So you’ve started studying for the AP® Microeconomics and AP® Macroeconomics exams, and you want to know what’s essential for your AP® Economics review. In that case, the production possibilities curve, sometimes called the production possibilities frontier, is a concept that you’ve got to know!

Introduction to Production Possibilities Curve

So what is the production possibilities curve? The PPC curve is a way to represent the different production opportunities for a person, country, or trading partners. The production possibilities curve is a crucial part of any AP® Economics review for a couple of reasons. First and foremost, you’ll definitively need to master this concept if you want to ace your AP® Microeconomics or AP® Macroeconomics exams, of course! Beyond that, the PPC curve gives you an opportunity to make sure you’ve got a handle on some important economics subjects, such as opportunity costs and efficiency. In this post, we’ll build our understanding of the production possibilities curve from the ground up and work through some practice questions together; so let’s get started!

A Simple Example

We’ll start by working out what exactly a production possibilities curve is by thinking through a simple example. It’s easiest to start by thinking about the production possibilities available to any person, like you or me. For example, during the day, I can make pizzas or hamburgers, and I only have so much time. This means I may have a set of production possibilities that looks like the following table:

Production Possibilities

Now that we know exactly what my production possibilities are.

Hey! Where did point F come from? For now, ignore F, but we will come back to it when we discuss efficiency.

This outward bowed PPC should look roughly similar to the graph at the beginning of this post. We can see that the graph of the production possibilities curve in our simple example demonstrates visually the different production opportunities that are available to me, depending on the length of time I want to spend making either pizzas or hamburgers. Now that we’ve seen how to put together a simple example, let’s find out what makes this concept so relevant to studying for AP® Macroeconomics and AP® Microeconomics!

What’s so Important About the PPC?

Knowing the production possibilities curve is key to your AP® Economics review because it brings together a number of economic concepts. In particular, the PPC curve demonstrates scarcity, trade-offs, opportunity costs, and economic efficiency. To illustrate, let’s look at each of these concepts in the context of our simple example.

First, how does the PPC curve demonstrate scarcity? In this case, the scarce resource is the number of hours in a day available to me. I can spend my entire day making 32 pizzas, but this means that I will have no more time available to make a hamburger. Because there are only so many hours in a day, as I spend more time focusing on making pizzas, I simply cannot make as many hamburgers. That’s scarcity!

Likewise, the production possibilities curve demonstrates the vital economic concept of trade-offs. Because time is a scarce resource, when choosing to make more hamburgers or more pizzas, I have to consider the inherent trade-off created. Let’s say that I’m spending all of my time making hamburgers. The PPC curve shows us that if I spend my entire day making hamburgers, I can make 11 of them. If I’m willing to make 1 less hamburger though, the PPC shows that I could make 15 pizzas. So, we can see the trade-off that is inherent to the last hamburger I decide to make—namely, I give up the 15 pizzas that I could have made.

The combination of scarcity and trade-offs brings us to opportunity costs. Opportunity costs are key to understanding both AP® Microeconomics and AP® Macroeconomics, and the production possibilities curve lets us clearly visualize them. In this example, my opportunity costs are what I give up in order to produce more pizzas or more hamburgers. To highlight this, consider moving from C to D and then from D to E. To move from making 8 hamburgers to 10 hamburgers, I have to give up 10 pizzas. Then, moving one step further, from 10 hamburgers to 11 hamburgers means that I have to give up 15 pizzas. I’m giving up more pizzas to move from D to E then I did from moving from C to D, even though I’m making fewer hamburgers. Economically, my opportunity cost of making hamburgers is rising.

Working through this example shows that the PPC curve can also tell us the difference between increasing opportunity costs and constant opportunity costs. As we just saw, reading our simple example’s production possibilities curve allowed us to visualize increasing opportunity costs. However, suppose that my set of production possibilities instead looked like this:

Production Possibilities

What’s the difference between this PPC curve, and our initial PPC curve? This one graphs a straight line! This linearity that we are noticing is the difference between increasing opportunity costs and constant opportunity costs. In our initial example, if I wanted to continue to increase the number of hamburgers I was making, I had to give up more and more pizzas (i.e. increasing opportunity costs). In this example, every time I decide I’d like to make another hamburger, it means I have to give up making 2 pizzas. This means that my opportunity costs are constant since I am always giving up 2 pizzas to make another hamburger.

Finally, the production possibilities curve also demonstrates efficiency, in particular, productive efficiency. Productive efficiency means that we are producing each of the goods in the least costly way. How can we see that on our PPC curve? Let’s go back to our very first example. Remember that point F? The point F allows us to highlight the difference between a productively efficient and productively inefficient allocation. If I’m producing at point F, I’m simply not making good use of my time. At point F I’m making 8 hamburgers and only 15 pizzas, but we know that if I was producing my goods in the least costly way, I could produce up to 25 pizzas. This is saying that point F is an inefficient allocation, while the points on our production possibilities curve are all efficient. By making only 8 hamburgers and 15 pizzas, I’m simply wasting some of my scarce resources, time. If I instead produce the good in the least costly way, by focusing and not wasting some of my time, I could be producing efficiently, and when I do so, I’ll be making 25 pizzas to go along with my 8 hamburgers.

What if there was a point beyond our PPC curve, for instance, 8 hamburgers and 30 pizzas? Well, I simply can’t make that many pizzas if I’m already producing 8 hamburgers, I just don’t have the time! This point is unattainable.

OK, but what about the AP® Macroeconomics or AP® Microeconomics Exam?

We’ve built up a simple example of the production possibilities curve and have a good understanding of why it’s so important, but what about the AP® Macroeconomics and AP® Microeconomics exams? For the last part of this AP® Economics review, we’ll work through a free response question. This practice will allow you to apply the concepts you’ve learned about the PPC curve, as well as illustrate how you could be tested on the PPC on an AP® Macroeconomics or AP® Microeconomics exam. The following question is taken from the 2013 AP® Macroeconomics Free Response Questions:

“Assume that the country of Fischerland produces only consumer goods and capital goods.”

Given this production possibilities curve for Fischerland, we are first asked which goods exhibit increasing opportunity costs. Thinking back to our original simple example, we note that this graph exhibits the same bowed-outward shape. First, consider consumer goods. As we move closer to the consumer goods axis, notice that we have to give up more and more capital goods to get closer. Likewise, as we move closer to the capital goods axis, we see that it takes giving up more and more consumer goods to get there. This means that both consumer goods and capital goods exhibit increasing opportunity costs. In each case, as we produce more of one good, we have to give up increasing amounts of the other!

Next, we are asked to plot a point where the economy of Fischerland is fully employed and efficiently using its resources. Thinking back to the concepts inherent to the production possibilities frontier, where were the efficient allocations? They were those points that were exactly on our PPC curve! So like our first example, we would simply plot a point exactly on Fischerlands PPC curve!

Finally, what about if a recession occurs in Fischerland? This means that instead of the economy of Fischerland being efficient, it is now inefficient. Thinking back to what we’ve learned, that’s any point where the economy isn’t producing as much as it could. So like our simple example, we plot a point that is inside the production possibilities curve!

Conclusion

The production possibilities curve is a vital economic concept for the AP® Microeconomics and AP® Macroeconomics exams. In this post, we’ve built our understanding of the PPC curve from the ground up and applied it to a free response question. With knowledge of the production possibilities curve, you’ll be able to visualize economic concepts ranging from scarcity and trade offs to opportunity costs and efficiency—all of which are critical concepts in any AP® Economics review! Can you think of some interesting examples of production possibilities?

Looking for AP® Macroeconomics practice?

Check out our other articles on AP® Macroeconomics.

You can also find thousands of practice questions on Albert.io. Albert.io lets you customize your learning experience to target practice where you need the most help. We’ll give you challenging practice questions to help you achieve mastery of AP Macroeconomics.

Start practicing here.

Are you a teacher or administrator interested in boosting AP Macroeconomics student outcomes?

Learn more about our school licenses here.