The production possibility curve shows you the point of production efficiency. Efficiency is important because we face limited resources. Not all goods can be produced with available resources. And we must choose which output we should produce and how much.
Definition of production possibilities curve
The production possibility curve represents the maximum number of output combinations that we can produce by maximizing the use of existing resources. That applies both at the micro (company) and macro (economic) level. Economists describe it in a two-dimensional graph, where each axis represents the amount of output of each item.
You might have thought that the graphics are unrealistic in the real world. You think, various combinations of goods we should be able to produce with existing resources.
It’s true, that’s unrealistic. But, like other economic models such as supply-demand, describing them in a two-dimensional graph makes it easy for us to understand the basic concept. Imagine if the graph is three dimensions or four dimensions?
The term is also known as the production possibilities frontier.
We face limited resources. Not all goods can be produced using existing resources.
How many products can we produce? It depends on:
- Quantity and quality of available resources
- Knowledge or technical capabilities of production (technology)
To maximize the use of resources, we must choose what products we must produce. How many products can we produce efficiently? To answer this, economists model in a production probability curve. The curve illustrates a combination of two outputs that we can produce at full capacity.
Below is the curve.
You can see, 600 units of product A and 800 units of product B is ideal (efficient). That’s because we maximize the use of resources. Likewise, with points B and C.
The slope of the curve represents the sacrifice between producing product A or product B. Because companies divert more resources to produce product B, it reduces the production of product A.
For example, from the graph above, when we decide to produce as many as 1,400 units of product A, we cannot produce product B. Likewise, to produce product B as many as 1,000 units, we cannot produce product A.
The combination points of product A and product B that we can produce efficiently will form a concave curve, which we call the production possibility curve.
Points outside the curved line (such as point X) represent a combination of outputs that are impossible for us to produce, taking into account available resources and technical capabilities. Meanwhile, the points inside the curve indicate an inefficient combination of output (point Z). Why inefficient?
That’s because the combination doesn’t maximize the use of resources. In other words, some of the resources are idle, so in fact, we are still able to increase production.
A shift in the production possibility curve
Can we possibly reach point X? The answer is possible.
The above curve assumes the existing quality and quantity of resources and production techniques are constant. So, to reach the point X, we can do it by:
- Increasing the quantity of resources, for example buying more production machines. By doing so, we can produce more output combinations.
- Improving the quality of resources such as by increasing labor productivity through the division of labor.
- Improving technology. With more sophisticated machines, we can achieve more combinations of output, using available resources. More technologically advanced machines allow workers to be more productive than using old technology.
Why you should understand the production possibilities curve
The curve provides insight into the efficiency of a production system when two products are produced together. You can use this curve to decide on the ideal ratio of units to be produced, to minimize costs while maximizing profits.
The curve shows the maximum output of various goods that a company can produce when all its resources are fully utilized. For example, a company can operate a production line capable of producing passenger cars and trucks. Producing more passenger cars means sacrificing the opportunity cost of having to produce fewer trucks.