Understanding and creating graphs are critical skills in macroeconomics. In this article, you’ll get a quick review of the production possibilities curve (PPC) model, including:
- what it’s used to illustrate
- key elements of the model
- some examples of questions that can be answered using that model.
What the PPC model illustrates
The production possibilities curve (PPC) illustrates tradeoffs and opportunity costs when producing two goods. We can use the PPC to illustrate:
- Opportunity costs
- Gains from trade
Key features of the PPC
- Two axes: each axis represents a good that a country produces, such as capital goods and consumer goods.
- One curve: A curve showing all possible combinations that can be produced given the current stock of capital, labor, natural resources, and technology. A straight line represents constant opportunity costs, and a bowed out line represents increasing opportunity costs.
Helpful reminders for the PPC
- Use arrows to indicate the direction of any change.
- If answering an exam question, read the prompt carefully to determine the shape of the PPC. Unless the prompt states otherwise, use a concave (“bowed out”) PPC to indicate increasing opportunity costs.
- Read the prompt carefully to determine how any points should be labeled. If the instructions say to label something as “warthog,” label it as “warthog.”
Common uses of a PPC
Showing whether an economy is in a recession or at full employment
|A PPC showing full employment output||A PPC showing a recession|
|A country is at full employment and produces two goods: consumer goods and capital goods. Draw a correctly labeled graph of the production possibilities curve (PPC). Indicate a point on your graph (labeled X) that represents full employment and in which both goods are being produced.||Assume there is a recession in Hamsterville. Draw a correctly labeled graph of the production possibilities curve in Hamsterville in which capital goods and consumer goods are being produced. Label point C in your graph representing the recession.|
A point on the PPC is an economy in full employment
A point inside the PPC is an economy in a recession
Try it yourself
Here is a question from the 2016 AP Macroeconomics Exam that uses the PPC. Try to solve it on your own, and then click on the solution to compare your work to the correct answer.
Want to join the conversation?
- Why is this PPC constant and not concave?(3 votes)
- The PPC does not have to be constant. It can be both constant and concave. It is constant only when a certain good requires the same resources to produce as another good. When the PPC is concave, it means that the opportunity cost for producing a certain good is not constant (i.e. it increases or decreases as production increases).(6 votes)
- what does a point OUTSIDE the PPF (the line) mean?(1 vote)
- How can an economy hope to produce a point outside the curve?(1 vote)
- An economy could shift their PPC outward and therefore produce outside the curve by increasing their factors of production (land, labor, and capital)(1 vote)
- how do you know when the PPC grave should be a curve (increasing) or a straight line (constant)?(1 vote)
- An outward bowed curve indicates increasing opportunity costs. A straight line indicates that opportunity cost is constant.(1 vote)
- draw a production possibility curve (label your .) the vertical axis shows the production of [public goods and the horizontal axis shows the production of private goods .the economy is currently producing at point a on the production possibility curve where 50% of all production is devoted to public goods and 50% to private goods(1 vote)