The Production Possibilities Curve: Definition and Examples
Using resources efficiently is an important goal for business and economic leaders. They often have a finite amount of resources available to build their products and must decide how to get the best output from them. One tool businesses use is a production possibilities curve which helps create a visual idea of how much of a resource is available. In this article, we discuss the production possibilities curve, including how it works and how to create one.
What is the production possibilities curve?
The production possibilities curve (PPC) is a graphical representation of the different amounts of a product that a business or economy can produce based on a shared resource. It is used to help illustrate the tradeoff between using more resources in one product over another. Also known as the production possibilities frontier, the PPC measures the maximum output of two goods based on a fixed amount of input.
For example, the government has a fixed amount of resources in the form of taxes. It wants to fund two programs with its resources, education and public health. Since devoting resources to one program means there are fewer resources available for the other, the government must decide which program they want to fund more. With a production possibilities curve, they can find the point where they would spend their resources most efficiently.
How a production possibilities curve works
Production possibilities curves work by illustrating on a graph the product possibilities frontier. You display the potential outputs of each item on the two axes of the graph. The maximum amount for each item is the amount you can produce if you devote all resources to that one item and zero to the other. Calculating this amount for both items then gives you the endpoints of your curve.
You calculate other points, based on removing some resources from one product and shifting it to the other. For example, a farmer has enough space for either 100 tomato plants or 50 cucumber plants. After graphing these two points, the farmer calculates how many cucumber plants they could grow if they grew 90 tomatoes instead of 100. They continue this exercise until they are down to 0 tomatoes and 50 cucumbers, then draw a line connecting the dots on the graph. Since there is a shared resource between the two items, the graph ends up in the shape of a curve.
Importance of the production possibilities curve
Business leaders and economists use the production possibilities curve to help them make production decisions because when two products share a finite resource, the PPC can help find the point where a business can optimize its resource use. It also illustrates if their current resource usage is less than optimal if their current production falls underneath the production possibilities curve.
It's important to note that the production possibilities curve only represents the number of goods you can produce if you're using your resources optimally, meaning it cannot tell you how many you should produce. For example, a farmer's optimal use of resources might lie at 50 tomatoes and 25 cucumbers. However, this doesn't account for cucumbers generating a slightly higher profit. The farmer needs to find a point on the curve where they are using their resources well but also maximizing the benefits.
How to create a production possibilities curve
To create a production possibilities curve, you can follow these steps:
1. Gather your information
Compile the information you want to graph. This includes the two items you want to compare and the resources needed for each. It's helpful to have this information either written on paper or in a digital spreadsheet in front of you to make graphing your production possibilities curve easier.
2. Label the axes
Create your graph by drawing two lines that meet at a right angle. Then place one item on each axis and label it. It doesn't matter which item goes on which axis. In addition, you can label the axis by the name of the item or get more specific and include the unit of measurement. For example, instead of listing one axis as “tomatoes,” you can write it as “pounds of tomatoes.”
3. Plot the maximums
Plot your first point by calculating the maximum amount you can produce of one item if you devoted all of your resources to it. Add this point to that item's axis, far enough away from the origin of the graph to give yourself some room. Do the same thing on the other axis for your remaining item. These points will form the eventual ends of your production possibilities curve.
4. Plot the remaining points
Pick one of your items and calculate how much of the other item you could produce if you produced a little less of this one. The amount you subtract depends on the unit of measurement for your goods. You do not need to graph every single possibility, as just a few points are enough to draw the graph. Pick one point that represents splitting resources evenly and then a few more between that middle point and your maximum points.
Once you have at least five points on your graph, you can then draw your curve. Start from the maximum point on your y-axis and draw a line connecting all the points down to the maximum on your x-axis. This is your production possibilities curve, with any point underneath the curve representing an inefficient use of resources.
Example production possibilities curve
Below is an example of how a business might use a production possibilities curve:
Comfort Clothing produces both shirts and dresses. They make both items out of cotton, which is a finite resource. To ensure that they are using their cotton efficiently, Comfort Clothing plots a production possibilities curve. They gather their information, which includes having 100 ounces of cotton to work with each month, and that it takes 8 ounces of cotton to make a shirt and 20 ounces to make a dress.
Comfort Clothing then draws its graph, placing shirts on the y-axis and dresses on the x-axis. They calculate that if they devote all 100 ounces of cotton to each product, they could produce either 12 shirts or five dresses. They add these points to their graph on each axis and label each. They then work to find points along the curve and come up with the following possibilities:
Comfort Clothing adds each of these points to their graph and draws a line connecting them all. They discover that their current production of six shirts and two dresses is an efficient use of resources, as it falls under their curve, and decide to produce an extra shirt per month.
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