Production Possibilities Curve

This model explains the concepts of scarcity, opportunity cost, trade-offs and overall production possibilities between the use of a resource for one alternative or the next.

Any increase in production of one good using current resources will decrease our ability to produce another good because of the scarcity of resources, There are three types of production possibilities curve:

1. Concave or bowed out PPC which occur when opportunity costs increase as you move to increase production of one good. Example: In order to produce an additional unit of capital goods, we must forgo the production of two consumer goods, yet another additional unit of capital goods will cause three units of consumer goods to be forgone.

2. Constant or straight line PPC exhibits a constant opportunity cost as you increase production of one good. Example: To produce one capital good will have an opportunity cost of two consumer goods. The next unit of capital goods produced and each subsequent capital good will have the constant opportunity cost of two consumer goods.

3. Convex or bowed in PPC (a rare occurrence) will have with each increase of one good a decrease in opportunity cost of the good forgone. Example: In order to produce an additional unit of capital goods, we must forgo the production of two consumer goods, yet another additional unit of capital goods will cause only one unit of consumer goods to be forgone.

PPC’s and Efficiency:

Any point on a PPC is completely efficient, meaning that there is an absence of waste.
A point inside the curve represents a misallocation of resources and is inefficient.
A point outside the PPC can only be reached through improvements in technology or increased resources.

For a more thorough explanation of the PPC, refer to Reffonomics:
Part I – Part II – Part III – Part IV