APMacro: Production Possibilities Curve

PPC Graph 3 Types

A production possibility curve shows the combinations of two or more goods and services that can be produced using all of the available factor resources efficiently.

A PPC is concave to the origin because the extra output resulting from allocating more resources to one particular good may decrease. As more resources are allocated towards Good Y, the extra output gets smaller and more of Good X has to be given up in order to produce the extra output of Good Y. This is known as the principle of diminishing returns. Diminishing returns occurs because not all factor inputs are equally suited to producing different goods and services.

The PPC does not always have to be drawn as a curve. If the opportunity cost for producing two products is constant, then we draw the PPF as a straight line.

The PPC would curve inward, with the opportunity cost of one good falling as more of it is produced. Specialization in producing successive units of a good determines its opportunity cost.



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