Review of the Production Possibility Curve

The PPC (also known as the Production Possibility Frontier -- PPF) separates those combinations of outputs that are possible from those that are impossible. In the picture, points A, B and C are all possible, while point D is impossible. The constraint of the PPC comes from the limited amount of resources available for production in an economy. This PPC shows the trade-off between investment goods and other goods. Point B shows more current consumption and less investment than point C. And both B and C are more efficient than A because it is impossible to get more of one good without reducing the amount of the other good. Why isn't that true at point A?

The PPC also shows the cost of one good in terms of the other good - called opportunity cost. If the people in the economy decide that they want more investment, a move from B to C, they know that the additional investment (IC-IB) will "cost" GB-GC of consumption of other goods. That is, they will have GB-GC less of other goods to consume if the choice is made to increase investment to IC from IB.

Finally, often the choice of where to be on the PPC helps determine future possibilities. In the graph shown, we have the decision to have more investment (point C) or more current consumption (point B). If C is the choice, then the economy will grow faster, and the PPC will shift out more than if point B is chosen.

So as a final review, the PPC shows four major things:

1. What possible consumption combinations exist in the economy.
2. What the trade-offs are in terms of the consumption of other goods if the consumption of one good is increased (opportunity costs).
3. By the point chosen, what type of decisions the economy as a whole is making about what to consume, who will benefit, and what it means for distribution and economic growth.
4. Whether the economy is efficient, or is it possible to increase output of one or more goods without decreasing some other good.
5. Over time, how it grows, how fast is the economy growing.