Unit 1 · Topic 1.3

Production Possibilities Curve

A production possibilities curve shows every combination of two goods a producer can make when it uses all its resources efficiently with its current methods.

Practice 3: ManipulationPractice 4: Graphing and Visuals

Part 1 · Hook

Why this matters

A family farm has 200 acres, six workers and two tractors. It can plant corn, beans or a mix. Plant all corn and there are no beans; switch some fields to beans and corn falls. One curve shows every best mix the farm can grow, and its shape tells you how much of one crop each extra unit of the other really costs.

Part 2 · Before you start

What this builds on

Part 3 · Prerequisite check

Quick check before you start

1. The opportunity cost of a choice is

  1. the value of the next-best alternative given up
  2. the money price of the choice
  3. the sum of every alternative given up
  4. zero when the choice is free
Show the answer

Only the single next-best alternative counts.

  • Correct: the value of the next-best alternative given up:
  • the money price of the choice:
  • the sum of every alternative given up:
  • zero when the choice is free:

2. A curve that falls to the right has

  1. a negative slope
  2. a positive slope
  3. a slope of 0
  4. a minimum point
Show the answer

One variable falls as the other rises.

  • Correct: a negative slope:
  • a positive slope:
  • a slope of 0:
  • a minimum point:

3. When a curve shifts right on a graph, the new curve is labeled

  1. with subscript 2 and an arrow from the old one
  2. with the same label as before
  3. with no label
  4. by erasing the old curve
Show the answer

Keep the old curve (1), add the new (2) and an arrow.

  • Correct: with subscript 2 and an arrow from the old one:
  • with the same label as before:
  • with no label:
  • by erasing the old curve:

Part 4 · See it

See it first

A bowed-out production possibilities curve for a farm's corn and beans through points A to E, with point U inside (idle resources), point Z outside (unattainable now) and a dashed outward-shifted curve PPC2 (growth).
A farm's PPC through A to E. U (2, 10) is inside: resources idle. Z (3, 16) is outside: not reachable now. PPC2 shows growth. Each extra truckload of corn costs 1, 2, 4 and then 7 truckloads of beans. Invented data for practice. LevlPrep original diagram.

Part 5 · Step by step

How it works, step by step

  1. The farm moves resources from beans to cornit uses fields and workers that are less and less suited to corn
  2. Each extra truckload of corn needs more of those less-suited resourcesit gives up more beans than the truckload before
  3. The opportunity cost of corn rises as more corn is grownthe PPC gets steeper as you move right: it bows out
  4. The farm gains more resources or better technologythe whole PPC shifts out, and combinations once outside it become reachable

Part 6 · Key ideas

Key ideas

  • A production possibilities curve (PPC) shows the most of two goods a producer can make with its resources and methods. It shows scarcity (points beyond it), trade-offs (moving along it) and opportunity cost (what one good costs in the other).
  • Points on the curve show productive efficiency; points inside mean idle or wasted resources; points outside cannot be produced now.
  • Bowed out means increasing opportunity cost; a straight line means constant opportunity cost; bowed in (rare) means decreasing opportunity cost.
  • More or better resources, or better technology, shift the curve out: economic growth. Losing resources shifts it in.
  • Opportunity cost of one more unit of X = units of Y given up ÷ units of X gained.

Part 7 · Misconception

A common mistake

The wrong idea: Point U, inside the PPC, is where the farm gives up the least, so it is the most efficient choice.

What actually happens: A point inside the curve wastes resources: the farm could grow more corn, more beans or both without giving anything up. Only points on the curve are productively efficient.

Part 8 · Check yourself

Check yourself

Exam-style questions. Anything you miss goes into your review queue.

1. What does a point on a production possibilities curve show?

  1. A combination made with some resources idle
  2. A combination that is out of reach today
  3. A mix made with no resources wasted
  4. The price of each good
Show the answer

The curve marks the most of one good that can be made for each amount of the other, with every resource in use and none wasted.

  • A combination made with some resources idle: Idle resources put a point inside the curve.
  • A combination that is out of reach today: Points beyond the curve cannot be made now.
  • Correct: A mix made with no resources wasted: Right: on the curve means efficient.
  • The price of each good: A PPC measures quantities, not prices.

Data

Hollis Farm's production possibilities

Combinations of corn and beans Hollis Farm can grow in a season with all its land, workers and machines (truckloads; invented data for practice)
CombinationCorn (truckloads)Beans (truckloads)
A020
B119
C217
D313
E46

2. Hollis Farm moves from combination C to D. What is the opportunity cost of that third truckload of corn, in truckloads of beans?

Type a number (truckloads). A four-function calculator is allowed, as on the exam.

Show the answer

Beans fall from 17 to 13 while corn rises from 2 to 3. Opportunity cost =17−133−2=4= \frac{17 - 13}{3 - 2} = 4 truckloads of beans.

  • Answer: 4 truckloads

Graph

A bowed-out PPC with points inside, on and outside

A bowed-out production possibilities curve for a farm's corn and beans through points A to E, with point U inside (idle resources), point Z outside (unattainable now) and a dashed outward-shifted curve PPC2 (growth).
LevlPrep original diagram.

3. In the graph, which point shows a combination the farm can grow but with some resources idle?

  1. B
  2. U
  3. Z
  4. E
Show the answer

U (2, 10) lies inside PPC1. The farm could grow more of both crops with the same resources.

  • B: B is on the curve: efficient.
  • Correct: U: Right: inside the curve.
  • Z: Z lies outside PPC1: it cannot be grown now.
  • E: E is on the curve: efficient.

4. Label the axes and the curve of this production possibilities graph for a farm that grows corn and beans.

???1

Work on the graph (it needs JavaScript), then check.

Show the answer

One good goes on each axis (Corn across, Beans up, as drawn), and the curve is the PPC.

  • Key: see the explanation

5. A new irrigation system lets the farm grow more of both crops on the same land. Show the change on the graph.

CornBeansPPC

Work on the graph (it needs JavaScript), then check.

Show the answer

Better technology raises what the farm can grow of both crops, so the whole PPC shifts out.

  • Key: the production possibilities curve shifts out

Part 9 · Summary

Summary

A production possibilities curve shows every combination of two goods a producer can make when it uses all its resources efficiently with its current methods. Points on it are efficient, points inside waste resources, and points outside are out of reach for now. Moving along the curve shows the trade-off; the opportunity cost of one good is the amount of the other given up per unit gained. A bowed-out curve shows increasing opportunity cost, a straight one constant cost. More resources and better technology shift the curve out (growth).

Part 10 · Up next

What comes next

Part 11 · Connections

Connections

Question set for this topic