Production possibility curve example

Assume that some imaginary nation devotes all its resources – land, labour and capital – to
producing just two goods, food and clothing

Various possible combinations that could be produced over a given period of time (e.g. a
year) are shown in the table.

Interpretation of entries:

there can be a year with a combination such that we produce 8 million units of food with
no unit of clothing if they only use our resources in producing food
there can be a year with a combination such that we produce 7 million units of clothing
with no unit of food if they only use our resources in producing clothes

The graph of the above table can be shown below:

The curve shows all the combinations of the two goods that can be produced with all the
nation’s resources fully and efficiently employed.

Production cannot take place beyond the curve. For example, production is not possible at
point w the nation does not have enough resources to do this.

Microeconomics and the production possibility curve

a production possibility curve illustrates the microeconomic issues of choices and

opportunity cost.

If the country chose to produce more clothing, it would have to sacrifice the production of
some food. This sacrifice of food is the opportunity cost of the extra clothing.

Suppose we are at point x (i.e. we produce 6 millions of units of food and 4 millions of unit of
clothing) and we want want to increase the production of clothing by 1 million units then the
units of food will decrease by 1 million. Thus the opportunity cost of the 1 million extra units
of clothing would be the 1 million units of food forgone

Similarly if we move from point y to point z (i.e. we are increasing units of clothing by 1
million more ) then it resulted in decrease in food production by 2 million units. Thus the
opportunity cost of the 1 million extra units of clothing here would be the 2 million units of
food forgone

The production possibility curve is not a straight line because the opportunity cost increases
if we want to increase the production of any one of the good

Macroeconomics and the production possibility curve

There is no guarantee that resources will be fully employed, or that they will be used in the
most efficient way possible. The nation may thus be producing at a point inside the curve.
For example point v
the economy is producing less of both the goods than it is possible for it to produce, either
because some resources are not being used or because it is not using the most efficient
method of production possible

Here we are concerned not with the combination of goods produced (a microeconomic
issue), but with whether the total amount produced is as much as it could be (a
macroeconomic issue).

Over time, the production possibilities of a nation are likely to increase. Investment in new
plant and machinery will increase the stock of capital; new raw materials may be discovered;
technological advances are likely to take place through education and training, labour is
likely to become more productive.

This growth in potential output is illustrated by an outward shift in the production possibility
curve. This will then allow actual output to increase: for example, from point x to point x'