What’s it: A production possibilities curve or production possibilities frontier is an economic model for describing the two goods we can produce efficiently using available resources and technology.
Efficiency is important because we are dealing with limited resources. Not all goods can be produced to meet our needs and desires with the available resources. And we have to choose which output we should produce and how much.
And the curve shows how we deal with the tradeoff between producing two goods when faced with limited resources. Thus, when we use more resources to make one good, fewer resources are available to produce another good. And the points along the curve represent the quantity we produce for the two goods by maximizing the available resources.
Why does the production possibilities curve use only a two-dimensional curve?
We may think curves are unrealistic in the real world. There are many goods and services around us, why only two? In fact, we can produce various goods and services with existing resources.
It’s true; it’s unrealistic if we compare it to the real world. But, like other economic models, such as the demand-supply model, depicting it in a two-dimensional graph makes us easier to comprehend the basic concepts. Economists use two items as representations for easy explanation. Imagine if the curve is three-dimensional or four-dimensional?
Even though there are only two items as representations, they are conceptually the same. The curve underscores how we deal with tradeoffs in producing goods given the available resources.
Why is the production possibility curve important?
Curves describe important concepts in production in economics. First, it provides insight into the efficiency when two products are produced together. For example, we can use this curve to decide the ideal ratio between the two products we choose to produce to minimize costs while maximizing profits.
The curve shows the maximum output we can achieve when all our resources are fully utilized. For example, a company operates a production line to manufacture passenger cars and trucks. The curve shows how many passenger cars and trucks can be produced. Conversely, when making fewer trucks, how many additional passenger cars can be achieved when maximizing resources and vice versa.
Second, the curve shows how we deal with tradeoffs in allocating resources. And therefore, we face an opportunity cost.
For example, if we allocate more resources to producing an item, less is left. So, we can only get less of the other stuff. So, in the above case, the company produces fewer trucks when it produces more passenger cars. And conversely, when it produces more trucks, the company can only produce fewer passenger cars.
How do economists explain the production possibilities curve?
The production possibilities curve helps us answer a basic question in economics: how do we produce goods and services. It explains how we can maximize the available resources to produce the two things we most need and want.
We face scarcity, which requires us to make choices. We cannot produce all goods and services to satisfy our unlimited needs and wants. Resources available are limited. We have to choose which one we have to produce.
Then, economists explain how we allocate resources through the production possibilities curve. The curve is as below:
Say, shoes and clothes are what we need and want the most. So we decide to use resources to produce both.
For example, we can produce at point A with the available resources. At that point, we maximize the resources and can have 60 units of clothes and 80 units of shoes. Therefore, point A is the ideal point where we can maximize production and resources.
So what about points B and C? Both we can also achieve using existing resources and technology and therefore, is also an ideal point. It’s just that, if we produce at points B and C, we get more clothes but fewer shoes. So, therefore, for example, we might choose to produce at point B with fewer shoes as an opportunity cost.
The ideal points at which we produce efficiently and maximize resources will form a curve when we connect them. The curve’s slope represents the tradeoff between making shoes or clothing. Because we divert more resources to produce clothes, it reduces shoe production and vice versa.
How about point Z? At that point, we are not producing efficiently. We do not maximize existing resources. We produce fewer shoes and clothes even though we could increase both outputs using existing resources.
Then, what about point X? It represents an impossible point for us to reach with the existing resources and production techniques. Our resources are insufficient, or the current production techniques make it impossible to produce. And we can achieve that only if we have more and better resources.
Or, we innovate to get more productive technology and production techniques. So, we can produce more shoes and clothes using existing resources.
What are the 4 assumptions of the production possibility curve?
Economists use several assumptions when describing production possibilities curves. They are:
- Only two items we produce
- Our resources are fully utilized
- Resources are fixed
- Production technology or technique is fixed
Changes in the last two points cause the curve to shift to the right or left. Shifting to the right means, we get more output. Conversely, shifting to the left indicates less output (inefficiency).
Why is the production possibilities curve concave?
The reason why the production possibilities curve is concave is that resources are unable to adapt. As a result, when we produce more of a good, the opportunity costs involved are higher. In other words, inadaptability makes us sacrifice more of another good when increasing the production of one good. This inadaptability occurs because not all resources are equally suitable for producing these two goods.
For example, we produce 80 clothes and 60 shoes at point C. We then increase shoe production and operate at point B. As a result, we make 70 units of shoes, 10 units more than at point C (60 units). However, this increase has an opportunity cost of fewer clothes. As a result, we can only produce 71 units at point B, 9 units less than at point C (80 units).
Then, from point B, if we increase shoe production to 80 and operate at point A, we must reduce clothes production to 60 units. In other words, to get 10 more shoes (80 – 70), we have to sacrifice more by reducing the production of clothes by 11 units (from 71 units to 60 units). Therefore, there is more opportunity cost involved than when we scale up operations from point C to point B.
How does the production possibilities curve show efficiency?
The points along the production possibilities curve are the most efficient. They show us the combination of two outputs produced by maximizing resources using existing production techniques. So, there are no idle resources.
On the other hand, production is inefficient if it operates under the curve, for example, at point Z. There are idle resources because we are producing below maximum capacity. Thus, we use fewer resources and produce less output than we can achieve.
What factors shift the production possibilities curve?
The production possibilities curve can shift to the right or to the left. A shift to the right indicates a growing economy if we relate it to aggregate output. Meanwhile, a shift to the left indicates contraction.
And the shift in the curve results from a change in:
- Quantity and quality of available resources
- Production techniques (knowledge and technology)
The resources in question refer to factors of production, namely land, labor, capital, and entrepreneurship. When more resources are available, we can produce more output. Their quality also matters. For example, more up-to-date physical capital, such as computer-aided machines, can produce more output than manual machines. More education or training also makes the workforce more productive.
Likewise, advances in technology and knowledge also make us more productive. So, we can produce more output even though the available input does not change.
Long story short, the curve is likely to shift to the right due to:
- More available labor, such as by increasing the birth rate
- A more productive workforce, for example, through education and training
- More available physical capital, such as machinery, for example, by increasing investment
- Better quality physical capital, for instance, by adopting more sophisticated technology
- More sophisticated production techniques, for instance, through computational optimization
- More advanced technology, for example, by increasing research and development
In contrast, the curve shifts to the left when:
- Depleted natural resources, for example, due to overexploitation
- Less available labor, for instance, due to the aging population
- A less productive workforce, for example, due to a poor education and training system
- Low physical capital accumulation, is not enough to compensate for depreciation
- Poor quality physical capital, for instance, due to wear and tear and relying on outdated technology
- Poor production technology and techniques, for example, due to low research and development