A whole economy faces the same kind of tradeoff as a shopper with a budget, only with workers and machines instead of dollars. You know opportunity cost from Opportunity Cost, and you know how to read the story a graph tells from Describing Graphs in Words. Put them together and you get the production possibilities curve (PPC).
Key idea
A PPC shows the largest combinations of two goods an economy can produce when it uses all its resources with today's technology. A point on the curve is efficient. A point inside is possible but inefficient: some resources are idle or misused. A point outside is unattainable for now.
Why it works
On the curve, every worker and machine is busy, so the only way to get more robots is to move some of them away from wheat: more of one means less of the other. Inside the curve, some workers or machines sit idle (as in a recession), so the economy could have more of both goods just by using them. Outside the curve, there aren't enough resources, or good enough technology, to make that much, although growth may make it possible later.
| Point | Robots | Wheat (tons) |
|---|---|---|
| A | 0 | 100 |
| B | 10 | 90 |
| C | 20 | 75 |
| D | 30 | 50 |
| E | 40 | 0 |
Worked example: Reading points against the table
Using the table, classify each combination: (a) 20 robots and 60 tons of wheat; (b) 30 robots and 60 tons of wheat; (c) 10 robots and 90 tons of wheat.
- (a) With 20 robots the economy can make at most 75 tons (point C). 60 is less than 75: inside, inefficient.
- (b) With 30 robots the most is 50 tons (point D). 60 is more than 50: outside, unattainable for now.
- (c) Exactly point B: on the curve, efficient.
Answer: (a) inefficient, (b) unattainable, (c) efficient.
Common mistake
Calling a point inside the curve "impossible." It is perfectly possible; it is just wasteful, because the same resources could make more. Another mix-up: thinking the PPC shows what people want. It shows only what the economy can make. Which point on the curve a society picks depends on what people want, but their wants don't move the curve. Check: for a given amount of the horizontal good, read the most the curve allows of the other, then compare.
A PPC holds three things fixed: the amount of resources, the technology, and the time period. Change one of them and the whole curve moves, which is the subject of Growth and Shifts of the PPC.