This means that each country has a comparative advantage in producing certain goods. A country can grow its economy and the standard of living only through specialization. However, acting in such a way will often lead to an overall inefficient economy for that country and impede its economic growth. That is why the PPC is generally bowed out.Ĭomparative advantage is essential in determining the PPC.Ī country might be capable of producing all goods and services it needs to have a functioning and stable society. In the real world, this is very unusual because there are diminishing benefits from additional resources. Regardless of where the production of either good is on the PPC, the opportunity cost is always the same. Meaning, the tradeoff of producing one good over the other remains constant. However, these added output gains gradually diminish, thus causing an outward curve.Ī straight PPC would mean there’s a constant opportunity cost. At first, adding additional resources for production will result in significant output gains. This means that each additional input factor of production has less of an impact at a certain point. The curved shape of the PPC reflects the law of diminishing returns. That is why generally, a country will be economically better off and more efficient if they split up their resources in the best possible combination. Some people are better fit to produce wine, while others might be better at growing apples. The same thing applies to the labor force used in production. Some land might be better to grow grapes, while another land is more conducive to growing apples. For example, if country A was only producing wine and apples. This is because certain resources are more productive or better suited for producing one thing over the other. A country or business is usually more efficient when it is producing a mix of goods. The Shape of the Production Possibilities CurveĮvery point between the highest and widest points (A to B) reflects a tradeoff of producing different combinations of both goods. Similarly, given the limited resources, any point outside the production possibilities curve is impossible to reach since the producers cannot produce more output. On the other hand, if the output falls somewhere inside the curve, not all resources are being used. Every additional unit of one good decreases the output of the other good.Īs seen in the above graph, if a company or country's output falls on the frontier, they are achieving their maximum possible output. In contrast, all along the actual curve (A, B, C) is the possibility frontier of production, where each point demonstrates the opportunity cost. On the other hand, any area beyond the curve (Y) is impossible to achieve because of its resource constraints. Through the correct allocation of its limited resources, a firm can maximize output and produce the most financial profit.Īs shown in the graph below, any spot inside the curve (X) reflects inefficient production, since not all the country's resources are utilized. Knowing the precise opportunity cost at each junction helps managers achieve productive efficiency. If a business provides two different goods or services, the PPC illustrates the opportunity cost. This same intuition will apply to microeconomics. This means that for each additional barrel of wine produced, fewer apples can be produced and vice versa. Economists refer to this type of tradeoff as the opportunity cost. The more economic resources-such as land, labor force, and capital-the country uses in making apples, the fewer resources it will have for producing wine. To understand the underlying intuition of the PPC, let us assume that a country produces just two specific goods: apples and wine. In macroeconomics, the PPC demonstrates the allocation of a country's available resources to produce all possible outputs. The PPC-sometimes called the Production Possibilities Frontier (PPF)-is an economic model that informs us about a country or firm's opportunity cost when producing more than one good or service. A Production Possibilities Curve (PPC) is an economic model illustrating the tradeoff in producing one good over another. Since economic resources are scarce, it is impossible to produce unlimited goods and services. What Determines How a Country Should Allocate Its Resources? How Does the Production Possibilities Curve Work? What Is the Production Possibilities Curve?
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