Production Possibility Curves (PPC) Production Possibility Frontiers (PPF)

Consider the case of an island economy that produces only two goods: wine and grain. In a given period of time, the islanders may choose to produce only wine, only grain, or a combination of the two according to the following table: Wine (thousands of bottles) Grain (thousands of bushels) 15 5 14 9 12

Production Possibility Frontier

The PPF shows all efficient combinations of output for this island economy when the factors of production are used to their full potential. The economy could choose to operate at less than capacity somewhere inside the curve, for example at point a, but such a combination of goods would be less than what the economy is capable of producing. A combination outside the curve such as point b is not possible since the output level would exceed the capacity of the economy.

The shape of this production possibility frontier illustrates the principle of increasing cost. As more of one product is produced, increasingly larger amounts of the other product must be given up. In this example, some factors of production are suited to producing both wine and grain, but as the production of one of these commodities increases, resources better suited to production of the other must be diverted.

Experienced wine producers are not necessarily efficient grain producers, and grain producers are not necessarily efficient wine producers, so the opportunity cost increases as one moves toward either extreme on the curve of production possibilities.

The slope of the line represents the opportunity cost of increasing the `X' good by one unit. For example, moving from A to B means gaining 50 defense units, but sacrificing 85 nondefense units. So the opportunity costs of moving from A to B is 85 nondefense units. This is what we have to give up.

Why does the production possibilities curve bow outward Why does the production possibilities curve bow outward? We have intentionally drawn the curve this way to reflect the principle of increasing costs. The Principle of Increasing Costs says that as production of a good expands, the opportunity cost of producing another unit generally increases.

This is because resources tend to be specialized so that some of their productivity is lost when they are transferred from what they do well to what they do poorly. One can see in the chart above that the opportunity cost of producing more and more defense goods increases.

No Specialized Resources

When resources are not specialized, the principle of increasing costs does not apply and the production possibilities frontier is a straight line. This is represented in the chart below which plots the production of right shoes versus left shoes. Resources required to produce each of these products are very similar.

Economic Growth

Economic growth is the increase in the economy's level of production Economic growth is the increase in the economy's level of production. Recall that the production possibilities frontier shows the possible production of two goods given the available resources and technology. Economic growth can occur because either the resource base expands, or the level of technology increases. Economies grow when population grows because labor is an important resource. The United States economy grew from a population of about 5 million in 1800 to over 90 million in 1900. This was a time of massive resource growth in our nation's history.

Economic growth also occurs when we learn how to use our existing resources more productively. This is what we call technological progress. For a given amount of resources, the economy's level of output increases. In either case, economic growth results in a shift outward of the production possibilities frontier.

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