If you're seeing this message, it means we're having trouble loading external resources on our website.

If you're behind a web filter, please make sure that the domains *.kastatic.org and *.kasandbox.org are unblocked.

Macroeconomics

Course: Macroeconomics>Unit 1

Lesson 2: Opportunity cost and the Production Possibilities Curve

Production possibilities curve

AP.MACRO:
MOD‑1 (EU)
,
MOD‑1.B (LO)
,
MOD‑1.B.1 (EK)
AP.MICRO:
MKT‑1 (EU)
,
MKT‑1.C (LO)
,
MKT‑1.C.1 (EK)
,
MKT‑1.C.2 (EK)
The production possibilities curve (PPC) is a graph that shows all of the different combinations of output that can be produced given current resources and technology. Sometimes called the production possibilities frontier (PPF), the PPC illustrates scarcity and tradeoffs. We can model tradeoffs and scarcity using the example of a hunter-gatherer who can split their time between two activities. Created by Sal Khan.

Want to join the conversation?

• Can't trading get you outside the curve?
• trading is not production so its not taken in this curve account
• I don't see why the amount of berries and rabbits couldn't go above the curve, but they could fall below it. You are assuming ceteris paribus. So all variables are the same, if you fall below the curve, Sall said that could be because you're not using equipment efficiently. But that's not assuming ceteris paribus. And if you're not assuming ceteris paribus, then you can get above the curve because you could find a way to work more efficiently.
• What you need to consider is that the frontier is assuming that you are working in the most efficient way. You simply cannot work harder, faster or more effectively with the resources you have. If you hold efficiency constant, when you are being as efficient as possible, then the only things you can change is how many berries or rabbits you get. If you get more rabbits you have to forgo some berries. This is known as Pareto efficiency or productive efficiency. You have to give something up to get something else.
• Why were the number of berries he got decreasing?
• Or you can think of it this way: Say there is a limited number of berries to pick within your village's area. As you pick more and more berries, there will be less berries out in the field for you to find so even though you spend more time looking for berries, you won't find more because there's only a set number of berries per area and the more you find the harder you have to look to find the remainder. That's one way of looking at it. Hope that helps.
• So far the PPF assumes a "two-goods" economy. If we wanted to visualize a "three-goods" economy, would the PPF have 3 axes (X, Y and Z) and the PPF would become a 3D curved surface originating from X=0, Y=0 and Z=0?
• This almost certainly begs the question, "What if a car maker such as Ford or GM wanted to decide how much of each car to produce?" They obviously have more than 3 models currently in production. Given that we do not have access to higher dimensions, how do these companies make such decisions?

As I ask this question, I realize that the model described above is extremely simplified. I'm just curious to know how this model is practically applied.
• How would unemployment in both industries/axes affect the PPF?
• Nothing would happen to the PPF with unemployment BUT the economy would be operating at a point inside the PPF. Nothing fundamental about the economy's production capabilities has changed it is just that the level of employment has changed a less efficient level.
• I don't understand what kind of scenario would give you half of a rabbit, or a quarter of a rabbit. Wouldn't the amount of rabbits/berries have to be natural numbers? He said that you could, for example, get 4.5 rabbits, and that would be on the graph. I don't understand how this is even possible.
• What's tricky is that on the one hand he's graphing a single day's work, but on the other hand he alludes to it being an average day's work. (The problem is that if you did nothing but berry-picking every day you would quickly pick ever berry there is, and then there would be no more. Vice-versa if you did nothing but rabbit-hunting, you would hunt the local stock to extinction.)

So you really have to think of it as the probable outcome of a single day's work for this one day. Ie, if we're going to toss a coin one time, only 0 or 1 heads or tails could happen, but you could still describe it fractionally as a .5 chance of heads and a .5 chance of tails. Likewise it's a probability of 4.5 rabbits today. But it's not really an average of 4.5 rabbits/day for the next year, because that might not be sustainable.

(Sal sort of glossed over things to try to make it simpler, but using hunter-gathering as the example makes the reality a bit odd, IMO.)
• Trying to take this another step. If you knew something about the relative values or weights of the two goods, could you determine the slope of the line you would need to find the curve at to find the optimal point you would want to be?
• Typically speaking, distances on the axis are of the same relative value. In this scenario, assuming the distance between 0 and 5 rabbits along the X axis is equal to the distance of 0 and 300 berries on the Y axis, it would mean that 5 rabbits is equal in value (also known as "utility" in the business world) to 300 berries. Accordingly, when creating a PPF for a real life scenario, the distances on the axes between two different options, be they products, projects, etc. should represent an equality in their relative worth, or "utility". When this is properly done, you can use the PPF to find which combination of the two options would maximize utility.
• what are some assumptions made by the ppf?
• It is simply assuming that if you were operating at maximum efficiency, these are the highest possible production combinations. It is a metric measuring the efficiency of a country's or firm's output, if you not reaching the plotted point amounts (which country's rarely do) then resources are not being maximized.
• What things would take us to the "impossible Point" I know that a new technology( new technique of hunting) would put us outside of the PPF but what else would put us there?
• Keep in mind that the PPF has a time component to it, so to reach a point outside the PPF we have to have a change in the future that increases our possible production.

One you already mentioned would be technology which increases the productivity of our existing resources.

The other would be if our available resources actually increased, e.g.:
A new worker shows up (increase in labor)
Rabbits become more plentiful (increase in "land")
We spend some time making a hunting weapon (investment that creates new capital)