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Production Possibility Curves


The PPF illustrates the concepts of choice and opportunity cost. If we assume that a country only produces food and clothing.  If that country wishes to produce more food, then it would have to sacrifice the production of some food.  Therefore we can say the opportunity cost of producing more food is clothing.



If the economy is producing at point V is can be seen that it is not producing efficiently, as it could increase production of clothing and food with the resources it already has. 


We can also demonstrate the concept of increasing opportunity costs.  In other words that as a country produces more and more of one good it has to sacrifice increasing amounts of the other.  This occurs because different factors of production have different properties, people have different skills, land differs in different parts of the country etc..  Therefore as a nation concentrates more on the production of one good, it has to start using resources that are less and less suitable.  The production of more and more clothing involves a growing marginal cost - ever increasing amounts of food have to be sacrificed for each additional unit of clothing produced.


It is because of increasing opportunity costs that the PPF is bowed outwards, rather than being a straight line.  In the diagram below we can see that as production increases from x to y to z, so the amount of food sacrificed rises for each additional unit of clothing produced.  The opportunity cost of the fifth million units of clothing is 1 million units of food.  The opportunity cost of the sixth million units of clothing is 2 million units of food.



Also remember the example of the nation going to war and having to produce guns after only producing food.


Shifts of the PPF

As you know, a nation is unable to produce outside of the PPF. A nation is able to shift its PPF to the right (so that it can produce a greater amount of goods) in one of two ways:

  • Increasing the number of resources available for production, e.g., increase in the number of workers or factories.
  • Increasing the quality of resources available for production, e.g., education and training makes workers more productive, technological progress allows machines to produce more with the same amount of resources.


A shift of the PPF can be shown below:


Notes on the Internet
An exercise to demonstrate scarcity and production possibility
Produced by John and Margaret Ray



E-mail Steve Margetts