This lesson on the production possibilities curve will be on the Basic Economic Concepts portion of the AP examination(s).
As we learned in the last lesson, opportunity cost is the next best alternative to a choice made in a trade-off, a decision in which a party gains one thing while losing the opportunity to gain the other.
To make decisions in economics, opportunity cost must be considered carefully and is thus often analyzed graphically.
The production possibilities curve (or PPC) is one of the most widely used methods of analyzing opportunity cost in economics.
Essentially, the production possibilities curve shows the relationship between two options (one on the x-axis, the other on the y-axis) and how the opportunity cost of obtaining one over the other changes.
Let's use the table from the last lesson, in which a business known as Super Snacks can either produce tacos or burritos when using all of their resources.
This table shows how different amounts of tacos produced impacts the amount of burritos which can be made instead, and vice versa.
As demonstrated in the last lesson, opportunity cost can also be calculated from one point to the other using this table.
By dividing the change in burritos produced by the change in tacos produced, we can obtain the opportunity cost of producing a taco.
On the flip side, we can divide the change in tacos produced by the change in burritos produced to obtain the opportunity cost of producing a burrito.
However, this analysis is much easier to do with a graph, especially with the production possibilities curve.
The graph above shows a curve which characterizes the relationship between burritos and tacos produced by Super Snacks.
As we discovered in the last lesson, the opportunity cost when moving from one point of production to another can be conveyed by slope in terms of a graph.
When observing this curve and the slope from point to point, it is obvious that the slope is becoming more and more negative. This means that as we produce more tacos, we are losing out on more and more burritos.
In economics, this phenomenon is known as the increasing opportunity costs. This means that as production of one good increases, the opportunity cost of producing that good also increases.
However, there are other observations we can make with this graph. We are given that the business, Super Snacks, is using all of their resources to make the tacos or burritos. This is evident because all of the points in the graph are on the line and thus Super Snack's use of resources is efficient.
However, what if they weren't using all of their resources?
This would be represented by a point within the production possibilities curve, as shown by the blue dot on the graph above. This phenomenon is referred to as unemployment, or when a producer is not utilizing their resources to the fullest.
In contrast, there are situations in which even the resources provided are not enough.
This would be represented by a point outside of the production possibilities curve, as shown by the red dot on the graph above. This represents production impossible given the producer's current resources.
In future lessons, we will analyze different types of production possibilities curves.
Opportunity Cost - The next best alternative to the choice made in a trade-off, represented by the slope of a production possibilities curve.
Increasing Opportunity Cost - As production of one good increases, the opportunity cost of producing that good also increases, represented by the increasing magnitude of the slope of a production possibilities curve.
Efficiency - When a producer is using their resources to the fullest, represented by a point on the production possibilities curve.
Unemployment - When a producer is not using their resources to the fullest, represented by a point inside of the production possibilities curve.
Unattainable - A combination of production unachievable given a producer's current resources, represented by a point outside of the production possibilities curve.
As we learned in the last lesson, opportunity cost is the next best alternative to a choice made in a trade-off, a decision in which a party gains one thing while losing the opportunity to gain the other.
To make decisions in economics, opportunity cost must be considered carefully and is thus often analyzed graphically.
The production possibilities curve (or PPC) is one of the most widely used methods of analyzing opportunity cost in economics.
Essentially, the production possibilities curve shows the relationship between two options (one on the x-axis, the other on the y-axis) and how the opportunity cost of obtaining one over the other changes.
Let's use the table from the last lesson, in which a business known as Super Snacks can either produce tacos or burritos when using all of their resources.
This table shows how different amounts of tacos produced impacts the amount of burritos which can be made instead, and vice versa.
As demonstrated in the last lesson, opportunity cost can also be calculated from one point to the other using this table.
By dividing the change in burritos produced by the change in tacos produced, we can obtain the opportunity cost of producing a taco.
On the flip side, we can divide the change in tacos produced by the change in burritos produced to obtain the opportunity cost of producing a burrito.
However, this analysis is much easier to do with a graph, especially with the production possibilities curve.
As we discovered in the last lesson, the opportunity cost when moving from one point of production to another can be conveyed by slope in terms of a graph.
When observing this curve and the slope from point to point, it is obvious that the slope is becoming more and more negative. This means that as we produce more tacos, we are losing out on more and more burritos.
In economics, this phenomenon is known as the increasing opportunity costs. This means that as production of one good increases, the opportunity cost of producing that good also increases.
However, there are other observations we can make with this graph. We are given that the business, Super Snacks, is using all of their resources to make the tacos or burritos. This is evident because all of the points in the graph are on the line and thus Super Snack's use of resources is efficient.
However, what if they weren't using all of their resources?
This would be represented by a point within the production possibilities curve, as shown by the blue dot on the graph above. This phenomenon is referred to as unemployment, or when a producer is not utilizing their resources to the fullest.
In contrast, there are situations in which even the resources provided are not enough.
In future lessons, we will analyze different types of production possibilities curves.
Key Terms
Production Possibilities Curve - A graph in which the different combinations of production (given a producer's current resources) are displayed.
Trade-off
- A decision in which a party gains one thing while losing the
opportunity to gain the other, represented by the different axes of the
production possibilities curve.Opportunity Cost - The next best alternative to the choice made in a trade-off, represented by the slope of a production possibilities curve.
Increasing Opportunity Cost - As production of one good increases, the opportunity cost of producing that good also increases, represented by the increasing magnitude of the slope of a production possibilities curve.
Efficiency - When a producer is using their resources to the fullest, represented by a point on the production possibilities curve.
Unemployment - When a producer is not using their resources to the fullest, represented by a point inside of the production possibilities curve.
Unattainable - A combination of production unachievable given a producer's current resources, represented by a point outside of the production possibilities curve.
Review Question(s)
3. What does a point inside of the production possibilities curve represent?
a) Uttainability
b) Efficiency
c) Unemployment
4. Why is the production possibilities curve typically NOT a line?
a) Because the opportunity cost (or slope) is constant.
4. Why is the production possibilities curve typically NOT a line?
a) Because the opportunity cost (or slope) is constant.
b) Because the opportunity cost (or slope) is NOT constant.
c) Because the economy is unstable.
Resources
To review key terms, go to the Quizlet here: https://quizlet.com/318860923/unit-1-lesson-3-the-production-possibilities-curve-flash-cards/
To watch a video explanation of the production possibilities curve, go to Jacob Clifford's video here: https://www.youtube.com/watch?v=O6XL__2CDPU
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