PPC: Production Possibility Curve/ PPF: Production Possibility Frontier

The production possibility curve is a hypothetical representation of the amount of two different goods that can be obtained by shifting resources from the production of one, to the production of the other. The curve is used to describe a society's choice between two different goods. They are useful to demonstrate the basic economic problem and opportunity cost. Usually, on the y-axis there are capital goods, with consumer goods on the x-axis.

• Show different combinations of goods and services that can be produced with a given amount of resources.

• There is no ideal point on the curve.

• Point inside the curve represents that resources are being used inefficiently

• Point on the curve represents efficient and maximum use of resources (economic efficiency)

• A point outside the curve is unattainable with the current level of resources, can only produce at this point if it finds a way of expanding its resources or improves productivity of those resources it already has, pushing the PPC outwards.

• While moving from one point to another ON the curve, a firm experiences opportunity cost.

Assumptions of a PPC:

1. Only two things can be produced

2. Resources are fixed

3. All resources are fully employed

4. Technology is also fixed

Why will the PPC move outwards (increase in productivity):

• More natural resources discovered

• Supply of labour increases due to inward migration or population growth

• Stock of capital equipment is increased

• Training and education increases

• Improvements in technology

• Improvement in healthcare reduce days lost

• Improving the quality and quantity of existing resources

• Hiring more workers

• Investing in additional machinery

• Investments in modern business infrastructure and communication networks such as roads and telecommunication.

The outwards movement of the PPC signifies economic growth. It is when the economy uses the capacity to produce more goods and services than it did previously which suggests that the size of the economy has increased.

Why will the PPC move inwards (decrease in productivity):

• Non renewable resources are depleted

• Supply of labour falls due to outward migration

• Capital equipment wears out and is not replaced

• Workforce and enterprise skills decline if education and training is reduced

• Economy is ageing and decaying infrastructure due to lack of investments

What is an economy?

An area in which economic activities of production, exchange and consumption take place.

The PPC shows the total amount of resources a natural economy can produce using its scarce resources. It can either produce an equal combination of capital and consumer goods or more of one, less of the other.