![]() The economy may be producing at some point inside the curve (producing less of both goods). The economy inside the PPCįigure 3 Unemployment=Inefficient resource use The opportunity cost of WW1 additional welfare services is AA1 armaments foregone. Armaments production falls from OA to OA1 and welfare services production increases from OW to OW1. If we move from point X to point Y we are reallocating resources out of armaments production and into welfare services production. We can see this opportunity cost in figure 2. The downward slope of the line or curve indicates that there is an opportunity cost in producing more of one type of commodity. Join up these points and the resulting line is called the production possibility curve.Next plot all those combinations of armaments and welfare services, if resources are fully employed (the X's in figure 1).On one axis we measure the quantity of armaments, on the other welfare services.We can represent this choice on a diagram as in Figure 1 below.įigure 1 Constructing a production possibility curve (Clearly more of one means less of another, so this is also a problem of opportunity cost). This is a problem in the allocation of society's scarce resources. between producing say armaments or welfare services (economists sometimes refer to this as the 'guns versus butter' problem). How is the curve constructed?Ĭonsider the choice facing many economies today, i.e. (b) organised as efficiently as possible. In other words, according to the graph Country A cannot simultaneously produce 401 loaves of bread and 700 guns, nor can it bake 400 loaves of bread and 701 guns simultaneously.A production possibility curve (sometimes known as a production possibility frontier, boundary or line) is a curve which indicates the maximum combination of any two goods which an economy could produce if all its resources were The country’s economy cannot support production beyond the quantities represented by the curve. The production possibilities curve is also called the production possibility frontier, because any point beyond the curve represents an impossible situation. Every point on the PPC represents a combination of the two products that a country can manufacture using its available resources. In order to increase production of one item, we must transfer resources from another sector. The Production Possibilities Curve demonstrates the phenomenon of scarcity: Manufacturing more of one product detracts from the production of another item. Production Possibility Curve - Conclusion Point A shows that the country can bake a maximum of 1,200 loaves of bread, even if gun production is completely discontinued.Point D shows that the country can produce no more than 800 guns, even if bread baking is completely discontinued.Point C shows that the country can produce 700 guns and 400 loaves of bread.Point B shows that the country can produce 400 guns and 1,000 loaves of bread. The Production Possibilities curve for Country A The Y axis indicates the quatity of bread. The X axis indicates the quantity of guns. Assume that Country A produces only guns and bread: In order to better understand the Production Possibilities Curve, consider the simple example shown in the diagram. One product lies on the X-axis, and the other lies on the Y-axis.Įxample of the Production Possibilities Curve The PPC always contains only two products, under the assumption that these are the only goods that the country produces. Each axis measures the quantity of a specific item produced. ![]() Point A intersects the Y-axis, and Point D intersects the X-axis. We will call this curve AD, using the letters at each end of the curve. The PPC is usually a concave curve that starts at one axis and ends at the other, as illustrated.
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