Production Possibility Curve

Idea

The production possibility curve (PPC) shows the maximum combinations of two goods an economy can produce when all its resources are fully and efficiently employed at a given state of technology. It is the standard diagram for scarcity, choice and opportunity cost.

Diagram

PPC for an economy producing consumer goods and capital goods. A–E are productively efficient (on the curve); I is attainable but inefficient (inside); U is unattainable at the current quantity of resources and level of technology (outside).

Mechanism

On the curve (A–E) — every point is productively efficient: all resources are fully employed and used in the best way, so more of one good can be obtained only by giving up some of the other. Point A devotes all resources to consumer goods; point E, all to capital goods.
Inside the curve (I) — attainable but inefficient: resources are unemployed or used wastefully, so output of one or both goods could rise with no trade-off.
Outside the curve (U) — unattainable at the present quantity of resources and level of technology, however desirable.

The PPC makes three ideas concrete:

Scarcity — combinations beyond the curve cannot be reached.
Choice — only one point can be occupied at a time, so producing at one combination means forgoing the others.
Opportunity cost — moving along the curve to gain more of one good means giving up some of the other; the slope of the curve measures that cost.

Considerations

The curve is drawn concave to the origin — bowed outward — because of the law of increasing opportunity cost: resources are not perfectly homogeneous or equally suited to producing both goods. As an economy reallocates from consumer goods (point A) towards capital goods (point E), the resources least suited to consumer-goods production are transferred first, so each additional unit of capital goods costs progressively more consumer goods than the last, and the curve steepens. A straight-line PPC would instead imply a constant opportunity cost.