PRODUCTION POSSIBILITIES CURVE (PPC)

or
Production Possibility Frontier (PPF)
 PRODUCTION POSSIBILITIES CURVE (PPC)

DEFINITION:
The PPC shows the various possible combinations of goods
produced within a specified time period with all its resources
fully and efficiently employed.

INTRODUCTION TO MICROECONOMICS
 PRODUCTION POSSIBILITIES CURVE (PPC)
(cont.)
Assumptions:

1. The economy is operating in full employment and full

production capacity (full efficiency).

2. The amount of resources available are fixed.

3. The state of technology does not change throughout the

production.
4. Resources are neither unemployed or underemployed

INTRODUCTION TO MICROECONOMICS
 Production “Possibilities” Table
a b c d e f
X 14 12 9 5 0 0
Y 0 2 4 6 8 10

Each point represents a specific

combination of goods that can be
produced given full employment of
resources.
NOW GRAPH IT: Put X good on y-axis and
Y good on x-axis
4
PRODUCTION POSSIBILITIES

A
14
B
12
X good 10 C
8

6 D

2
E
0
0 2 4 6 8 10
Y good 5
PRODUCTION POSSIBILITIES

A
14
B
12
G
10 C
X
8

6 D

4
H
2
E
0
0 2 4 6 8 10
Y 6
PRODUCTION POSSIBILITIES

Impossible/Unattainable
A (given current resources)
14
B
12
X good G
10 C
8
Efficient (Full Employment)
6 D

4 Inefficient/
Unemployment
2
E
0
0 2 4 6 8 10
Y good 7
 Opportunity Cost
Economists use the term opportunity cost to indicate what must be
given up to obtain something that’s desired
Production “Possibilities” Table
a b c d e f
Books 0 3 5 8 10 0
Pens 20 17 14 10 8 10

9
 Opportunity Cost
Example:
1. The opportunity cost of
moving from A to B is… 3 Pens
2.The opportunity cost of
moving from B to D is… 7 Pens

3.The opportunity cost of

moving from D to B is… 5 Books

4.The opportunity cost of

moving from A to C is…6 Pens
4.The opportunity cost of moving
from E to B….
7 Books

10
Production “Possibilities” Table
a b c d e f
Z 0 80 110 200 300 0
P 1120 1000 908 850 700 10

11
 Opportunity Cost
Example:
1. The opportunity cost of
moving from A to B is… 120 P
2.The opportunity cost of
moving from B to C is… 92 P

3.The opportunity cost of

moving from D to B is… 120 Z

4.The opportunity cost of

moving from A to C is…212 P
4.The opportunity cost of moving
from E to B….
220 Z

12
 Opportunity Cost
Example:
1. The opportunity cost of
moving from A to B is… 2 Bikes
2.The opportunity cost of
moving from B to D is… 7 Bikes

3.The opportunity cost of

moving from D to B is… 4 Computers

4.What can you say about point

F? Unemployment
5.What can you say about point G?
Unattainable

13
Assignment
PP A B C D E

CDs 0 5 10 15 20

TVs 20 18 15 6 0

1) Opportunity cost of 5 units of CD?

2) Opportunity cost 15 units of CDs
3) Draw the PPC

INTRODUCTION TO MICROECONOMICS
PRODUCTION POSSIBILITIES CURVE (PPC)
(cont.)
Machine
If it allocates all its resources to machine, it will
produce at Point A.
16
A If it allocates all its resources to butter, it will
produce at Point F.
14
The country A, produces two products –
12 C butter and machine.

If the country A is at Point C on

10 D the PPC, it can produce the
combination of 2,000 kg butter
8 and 12,000 units of machine.

6 Point D shows the production of

3,000 kg butter and 9,000 units
4 of machine.

2
F
0 1 2 3 4 5 Butter

INTRODUCTION TO MICROECONOMICS
 FACTORS THAT INFLUENCE
THE SHIFT OF PPC
Machine
1. Economic
Growth 16
When the country
14 enjoys economic
growth, the PPC
12 bounds outward.

10

8
When the country
6 is struck by natural
disasters, low
4 economic growth
will decline and the
2 PPC will shift to the
left.
Butter
0 1 2 3 4 5

INTRODUCTION TO MICROECONOMICS
 Economic growth and PPC

In this graph Growth of an economy is indicated by a right

ward shift from PP to P1P1.
P1
This shift is due to improvement in technology, News ways of
P
production are found, Greater savings, investment and
Cloth

P2 capital formation, when skill and efficiency of human

resources increases.

A shift towards left from PP to P2P2 as shown in this graph

indicates that There is reduction in resources due to natural
calamities or war, There prevails unemployment to a large
P2 P P1 extent. Underutilization of resources.
Wheat
 Question #1
BP Oil Spill in the Gulf
Q
Decrease in resources
decrease production
possibilities for both
Y Good

Q
X Good
18
 Question #2
Faster Technology
Q
Quality of a resource
improves shifting the
Y Good curve outward

Q
X Good 19
 Question #3
Floods in the Kerala
Q
Decrease in resources
decrease production
possibilities for both
Y Good

Q
X Good 20
 Question #4
Significant increases in education
Q
The quality of labor is
improved. Curve shifts
outward.
Y Good

Q
X GOod 21
FACTORS THAT INFLUENCE THE SHIFT OF PPC
(cont.)
Machine
3. Population
16

14
Increase in
population
12

10

8
Decrease in
6
population
4
2

0 Butter
1 2 3 4 5

INTRODUCTION TO MICROECONOMICS