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Production Possibilities Curve

The efficient production possibilities for a single producer or group of producers can be shown graphically. Such a graph is called the production possibilities curve. It is based on this idea: for any amount of one good that is produced, there is one efficient (maximum) amount of another good that could also be produced, given the resources and technology we have to use. For example, if we wish to produce a particular amount of good X, there is a maximum amount of good Y that could also be produced.

In class, we used examples from your study guide, but here is another:

Suppose we have three producers, Red, Purple and Blue.

Red can produce 5 X or 5 Y (so each X costs 1 Y and each Y costs 1 X).

Purple can produce 10 X or 30 Y (so each X costs 3 Y and each Y costs 1/3 X)

Blue can produce 5 X or 20 Y (so each X costs 4Y and each Y costs 1/4 X)

What do the possibilities look like? One possibility would be to have all three producers produce Y (and no one produce X). If we did this, the total output would be 55 Y and 0 X. This would be efficient (and is possible). It is shown as the first combination on the table below.

If we want any X produced, the comparative advantages (costs) would require that Red produce the X, since Red is the lowest cost producer. Each X that Red produces would require giving up one Y, so we could get 1X and 54Y, or 2X and 53Y, or 3X and 52Y, etc. If we want more than 5 X produced, we would then have Purple produce them (at a cost of 3Y each). Only if we want more X than Red and Purple could produce would we have Blue make any X.

Following this line of thinking, we get the table below:

Here, the red numbers represent Red switching from making Y to making X (the first five Xs must be made by Red in order to be efficient). The trade-off or cost of Red doing this is that each X costs one Y. The purple numbers represent Purple then switching from Y to X, at a cost of three Y per X. The blue numbers represent Blue switching from Y to X, at a cost of four Y per X.

If we graph these efficient possibilities, we get a diagram called the production possibilities curve, which shows all of the combinations of flats and lubes that are possible and efficient. The segments' colors correspond to which producer is being switched from Y to X (red for Red, purple for Purple, and blue for Blue):

This graph is the production possibilities curve (PPC for short).

While you won't have to make a PPC, there are a few things you should know about it:

First, the

Second,

Third,

Fourth,

In addition,

In addition to having more resources, the possibilities might be expanded by having better technology, education (training), weather, or infrastructure (such as communications or transportation of parts and the like). If such changes make greater production possible, a new production possibilities curve must be drawn, as is shown below.

The curves shown above are smoother than the Red, Purple, and Blue curve, reflecting the shape we would expect if there were many more resources or producers (actually, the smooth curves are made up of many tiny segments put together instead of only three). These might reflect the production possibilities of X and Y for a large factory, a large city with lots of producers, or a whole country.

The PPC does not have to show two relatively specific goods. We could designate that X is "pizza" and Y is "everything else," for example. For that matter, we can use it to show any two good that could be produced with a given set of resources

Copyright 2006 by Ray Bromley. For economics information, and other information about Ray Bromley, visit www.raybromley.com. Permission to copy for educational use is granted, provided this notice is retained. All other rights reserved.

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