The production possibility curve or production possibility frontier is a graphical representation that shows the combination of outputs that might be produced by the economy using available production factors and production technology.
Take an example, a country produces two goods, clothing and shoes. If all the resources were all allocated to produce clothing, the country would produce 1,000 clothes and the production of shoes would be zero. Conversely, if all resources were devoted to producing shoes, the country would produce 4,000 shoes and not produce clothing.
Most likely, resources will be shared between the two industries. Possible output combinations are shown exactly on the curved lines of the production possibilities curve.
Because resources are scarce, not every combination of shoes and clothing is possible. Production at points outside the curve (for example at point C) is not possible given the limited availability of resources and technology.
Meanwhile, efficient production is shown at curve points (such as point A and point B). This implies that the country gets everything that can be produced (clothing and shoes) from available resources.
There is no way to produce more than one item without producing less for another item. Therefore, there is an opportunity cost when it comes to choosing to increase the production of one of them, whether shoes or clothing.
For example, the country currently produces 700 clothing and 3,200 shoes. To increase clothing production to 800, shoe production must drop to 3,000.
Conversely, the opportunity cost to increase clothing production from 600 to 700 is 200 shoes (3,200-3,000). Thus, the opportunity cost of each clothing product is two shoes.
The opportunity cost for clothing depends on the number of clothes and shoes currently produced. The opportunity cost of an outfit will be high when the economy produces many clothes and some shoes. The opportunity cost of clothing is low when the economy produces several clothes and many shoes.