The Production Possibility Curve (PPC) is an economic model that considers the maximum possible production (output) that a country can generate if it uses all of its factors of production to produce only two goods/services

Any two goods/services can be used to demonstrate this model

Many PPC diagrams show capital goods & consumer goods on the axes

• Capital goods are assets that help a firm or nation to produce output (manufacturing). For example, a robotic arm in a car manufacturing company is a capital good

• Consumer goods are end products & have no future productive use. For example, a watch

The use of PPC to depict the maximum productive potential of an economy

• The curve demonstrates the possible combinations of the maximum output this economy can produce using all of its resources (factors of production)

• At A, its resources are used to produce only consumer goods (300)

• At B, its resources are used to produce only capital goods (200)

• Points C & D both represent full (efficient) use of an economy's resources as these points fall on the curve. At C, 150 capital goods and 120 consumer goods are produced

The use of PPC to depict opportunity cost

• To produce one more unit of capital goods, this economy must give up production of some units of consumer goods (limited resources)

• If this economy moves from point C (120, 150) to D (225, 100), the opportunity cost of producing an additional 105 units of consumer goods is 50 capital goods

• A movement in the PPC occurs when there is any change in the allocation of existing resources within an economy such as the movement from point C to D

The use of PPC to depict efficiency, inefficiency, attainable and unattainable production

• Producing at any point on the curve represents productive efficiency

• Any point inside the curve represents inefficiency (point E)

• Using the current level of resources available, attainable production is any point on or inside the curve and any point outside the curve is unattainable (point F)