The Production Possibilities Curve
A food truck in Chicago has one afternoon, one grill, and a pile of ingredients. Every extra taco she makes means fewer burritos. How many burritos does one more taco cost her? And what if a new grill lets her make more of both? A single graph, the production possibilities curve, answers all of these questions.
What a PPC shows
Resources are scarce, so an economy cannot produce everything it wants. To keep things simple, economists picture an economy that makes only two goods, using all of its resources and its current technology.
Here is a small Texas town that uses its farmland for wheat and corn. Wheat is on the horizontal axis and corn on the vertical axis.
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On the curve (A): resources are fully and efficiently used. The town cannot make more of one good without making less of the other. This is efficient production.
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Inside the curve (B): some resources are unemployed or wasted, for example idle farmland or workers without jobs. This is inefficient production. The town could make more of one good, or both, without giving anything up.
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Outside the curve (C): the town cannot make this with its current resources and technology. It is unattainable.
A production possibilities curve (PPC) shows the combinations of two goods that an economy can produce. In your own words, define a PPC, and explain what the points on…
A production possibilities curve (PPC) shows the combinations of two goods that an economy can produce. In your own words, define a PPC, and explain what the points on the curve, inside the curve, and outside the curve each tell us about production.
A small town in Texas can use its farmland to produce only wheat and corn. Consider these points on its PPC graph, with wheat on the horizontal axis and corn on the…
A small town in Texas can use its farmland to produce only wheat and corn. Consider these points on its PPC graph, with wheat on the horizontal axis and corn on the vertical axis: Point A is on the curve, Point B is inside the curve, and Point C is outside the curve. Classify each point as efficient, inefficient, or unattainable, and give one reason for each.
Opportunity cost along the curve
Moving along the PPC means giving up some of one good to get more of the other. The opportunity cost of a good is the amount of the other good you give up to get it.
The same idea works for time. Mateo has 6 hours to study. Moving from (4 hours of math, 2 hours of history) to (5 hours of math, 1 hour of history), he gains 1 hour of math and gives up 1 hour of history. The opportunity cost of the extra hour of math is 1 hour of history.
Mateo has 6 hours before a big test. He can spend each hour studying math or studying history. If he moves from studying 4 hours of math and 2 hours of history to 5…
Mateo has 6 hours before a big test. He can spend each hour studying math or studying history. If he moves from studying 4 hours of math and 2 hours of history to 5 hours of math and 1 hour of history, what is the opportunity cost of the extra hour of math? Explain what "opportunity cost" means in this case.
An economy produces only laptops and tablets. Its production possibilities are shown in the table. | Combination | Laptops | Tablets | |---|---|---| | A | 0 | 60 | | B |…
An economy produces only laptops and tablets. Its production possibilities are shown in the table.
| Combination | Laptops | Tablets |
|---|---|---|
| A | 0 | 60 |
| B | 10 | 50 |
| C | 20 | 30 |
| D | 30 | 0 |
(a) Calculate the opportunity cost, in tablets, of each laptop when moving from A to B, from B to C, and from C to D.
(b) Does this PPC show constant or increasing opportunity cost? Explain how you know.
Constant vs. increasing opportunity cost
The shape of the PPC tells you how opportunity cost behaves.
Straight line = constant opportunity cost. Suppose a food truck owner can make at most 100 tacos or 50 burritos a day, trading off at a steady rate. Each burrito costs $100 \div 50 = 2$ tacos, no matter how many she already makes. The slope is the same everywhere.
Bowed-out curve = increasing opportunity cost. Most real economies have resources that are better suited to one good than the other. Take a state that makes corn and solar panels. Suppose a different state finds that its first 10 thousand tons of corn cost 3 thousand solar panels, but its last 10 thousand tons cost 12 thousand. At first it moves the farmland best suited to corn into corn and gives up only a few solar panels. As it makes more corn, it must move workers and land that are good at solar panels, so each extra bit of corn costs more and more.
A food truck owner in Chicago can make at most 100 tacos or 50 burritos in a day using all of her time and ingredients, and she can trade off between them at a constant…
A food truck owner in Chicago can make at most 100 tacos or 50 burritos in a day using all of her time and ingredients, and she can trade off between them at a constant rate along a straight-line PPC.
(a) Write the opportunity cost of one burrito in tacos.
(b) Is a day with 40 tacos and 30 burritos attainable? Is it efficient? Explain.
(c) How many burritos can she make if she makes 60 tacos and uses resources efficiently?
A state's economy produces corn and solar panels. The table shows efficient combinations. | Combination | Corn (thousand tons) | Solar panels (thousands) | |---|---|---|…
A state's economy produces corn and solar panels. The table shows efficient combinations.
| Combination | Corn (thousand tons) | Solar panels (thousands) |
|---|---|---|
| A | 0 | 40 |
| B | 10 | 36 |
| C | 20 | 28 |
| D | 30 | 16 |
| E | 40 | 0 |
(a) Calculate the opportunity cost of 10 thousand tons of corn at each step from A to E, in thousands of solar panels.
(b) Explain why the opportunity cost changes as the state produces more corn. Use the idea that resources are not equally suited to both goods.
(c) The state is currently producing 20 thousand tons of corn and 20 thousand solar panels. Explain whether this point is attainable and efficient, and describe one way the state could produce more of both goods.
(d) A drought permanently reduces the amount of corn the state can grow with the same resources, but has no effect on solar panels. Describe the effect on the PPC, including which intercepts change.
Shifts and movements
Two different things can happen to an economy on a PPC graph.
A movement along the curve means choosing a different mix of the same two goods with the same resources. For example, shifting from 30 consumer goods and 70 military goods to 50 and 50 is a move along the PPC. It shows a trade-off, not growth.
A shift of the curve means the economy's capacity has changed.
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Outward shift (economic growth): more resources (labor, capital, land), more education (human capital), or better technology.
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Inward shift: resources are lost, for example a hurricane destroys factories, or a war or disaster reduces the labor force.
A technology that improves only one good rotates the curve. The intercept for that good moves out and the other stays put. For example, a faster oven lets the food truck make 150 tacos instead of 100, but still only 50 burritos. The taco intercept moves out, the burrito intercept stays, and the curve pivots.
When both goods improve by the same proportion, the whole line shifts out in parallel. Aaliyah's studio is an example: with an assistant, she can make 18 videos or 9 podcast episodes instead of 12 or 6. Her opportunity cost of an episode stays at 2 videos, since $12 \div 6 = 18 \div 9 = 2$, so the slope is the same, but both intercepts move out.
A country produces only military goods and consumer goods. Describe what happens to its PPC, or to its position on the PPC, in each of these cases, and explain your…
A country produces only military goods and consumer goods. Describe what happens to its PPC, or to its position on the PPC, in each of these cases, and explain your reasoning:
(a) A new technology doubles the output of consumer goods but does not affect military goods.
(b) A hurricane destroys many factories that produce both types of goods.
(c) The country moves from producing 30 units of consumer goods and 70 of military goods to 50 and 50, both on the same curve.
Aaliyah runs a small studio that makes either 12 videos or 6 podcast episodes per week, and she can trade off at a constant rate. She hires an assistant, which lets her…
Aaliyah runs a small studio that makes either 12 videos or 6 podcast episodes per week, and she can trade off at a constant rate. She hires an assistant, which lets her make 18 videos or 9 podcast episodes per week at the same constant rate.
(a) Write the opportunity cost of one podcast episode in videos before and after hiring the assistant. Did it change? Explain.
(b) Describe the shift in her PPC and explain which economic concept it illustrates.
(c) Before hiring, she produced 8 videos and 2 podcast episodes. Is that point efficient? After hiring, can she produce 8 videos and 5 podcast episodes? Justify each answer with numbers.
(d) Explain why a shift of the PPC differs from a movement along the PPC.
Back to the food truck: one more burrito costs the owner 2 tacos, and a new grill would shift her whole PPC outward.