A fundamental issue in Economics is determining the most efficient way to distribute limited resources. A production possibility curve (PPC) illustrates the possible production combinations of two different goods or services using those resources.

Producing along the PPC

1. The PPC above shows the maximum number of houses (on the horizontal axis) and vehicles (on the vertical axis) that can be made, using all the existing resources in the economy.
2. An economy can choose to produce a maximum combination of goods represented by any point in its PPC curve.
3. Points A, B, C, and D (along with any other point on the PPC) can be reached without needing additional resources than those available in the economy.
4. However, all the available resources must used as efficiently as possible for the economy to produce at any point along its PPC (the production possibilities are maximised).

Producing inside the PPC

1. Figure 1's economy can produce, if all its current factors of production are used as efficiently as possible, a maximum combination of goods at any point along its PPC curve.
2. Therefore, if the economy produces a combination of goods at any point inside its PPC curve (like point F), that means that either:
   1. Not all the economy's factors of production are utilised.
   2. Not all the economy's factors of production are utilised efficiently: there is losses in the production possibilities due to inefficiencies.
3. For Figure 1's economy to move from point F to any point closer (or at) its PPC curve, it must either utilise more of its currently available factors of production or improve its production efficiency.

Producing outside the PPC

1. Producing at point E (or any other point beyond the PPC) is unattainable with the economy's existing resources, because it means that point E lies beyond the production possibilities of the economy.
2. The economy simply does not have the resources (factors of production) to produce 250 burgers and 250 laptops. Producing that quantity of burgers and laptops simultaneously would require additional or improved resources.
3. In order to produce at any point outside its PPC curve (like point E), the economy must access extra or better resources than those currently available.

Assumptions of the PPC model

The PPC model simplifies the complexities of an economy by making several key assumptions:

1. Two Goods: The economy produces only two goods or services (e.g., consumer goods and capital goods), simplifying the analysis.
2. Fixed Resources: The quantity and quality of resources (land, labor, capital, and entrepreneurship) are constant.
3. Fixed Technology: The level of technology remains unchanged during the analysis period.
4. Full Employment and Efficiency: All resources are used fully and efficiently, meaning there is no waste or unemployment.

Increasing versus constant opportunity costs in a PPC model

In the previous section the concept of opportunity costs was introduced as the value of the next best alternative that must be sacrificed when making a choice between different production options.

A PPC curve can showcase two types of opportunity costs between two goods an economy is producing:

• Increasing opportunity costs.
• Constant opportunity costs.

Increasing Opportunity Costs

Increasing opportunity costs occur when producing additional units of one good requires increasingly larger sacrifices of the other good.

1. In Figure 1, if the economy is producing at point B (around 240 burgers and 160 laptops), it may choose to produce at point A instead (260 burgers and 50 laptops). Moving to point A:
   1. The economy is sacrificing 110 laptops (from 160 to 50) only to increase the production of burgers by 20).
   2. The opportunity costs of those 110 laptops is really low. By choosing to produce those 110 laptops, they are only sacrificing the production of 20 more burgers.
2. Now let's say the economy is producing at point D (280 laptops and 50 burgers) and chooses to produce move its production to point C. In this case:
   1. The economy is giving up on 50 laptops (from 280 to 240) in order to produce 125 more burgers (from 50 to 175 burgers).
   2. The opportunity cost of laptops those 50 laptops is really high. By choosing to produce those 50 laptops, they are giving up on the production of 125 more burgers.

Figure 1 illustrates a combination of goods with increasing opportunity costs:

• The opportunity cost of laptops increases as the number of laptops produced increases.
• Vice versa, the opportunity cost of burgers also increases as the number of burgers increases (check it yourself!).

Why are opportunity costs increasing?

1. As resources are reallocated from producing one good to another, factors of production become less efficient due to specialization.
   1. If Figure 1's economy has some tech factories specialized on the production of laptops, utilising those physical capital resources (the factories) to produce burgers is an inefficient use of the factors of production.
2. Not all resources are equally adaptable to different types of production.

Constant Opportunity Costs

Constant opportunity costs occur when producing more of one good results in a constant and unchanging sacrifice of the other good.

1. In Figure 2, if the economy is producing at point B (around 190 burgers and 100 laptops), it may choose to produce at point A instead (240 burgers and 50 laptops). Moving to point A:
   1. The economy is giving up on 50 laptops (from 100 to 50) to increase the production of burgers by 50.
2. Now let's say the economy is producing at point D (90 burgers and 200 laptops) and chooses to produce move its production to point C (140 burgers and 150 laptops). In this case:
   1. The economy is sacrificing 50 laptops (from 200 to 150) in order to also produce 50 more burgers (from 100 to 150 burgers).

Figure 2 illustrates a combination of goods with constant opportunity costs:

• The opportunity cost of laptops remains constant regardless of the number of laptops produced (in Figure 2's case, the tradeoff is always 1 to 1).
• Vice versa, the opportunity cost of burgers also remains constant as the number of burgers increases (check it yourself!).

Features of the PPC model

Opportunity cost

We have just seen that the opportunity cost of one good is the value of the next best alternative that is forgone when making a choice. This concept is reflected by the PPC model:

1. Moving along the PPC demonstrates that producing more of one good requires sacrificing some quantity of another good.
2. The existing trade-off between two goods, the opportunity cost, is the essence of the PPC model.

Scarcity

In previous sections we introduced the idea that scarcity arises because resources (land, labor, capital, and entrepreneurship) are limited, while human wants are unlimited. This concept is reflected by the PPC model:

1. Due to scarce resources, the economy cannot operate beyond its production possibilities curve (PPC).
2. Any point beyond the PPC, such as point E in Figure 1, is unattainable because the economy lacks sufficient resources to produce those levels of output.

Choice

In previous sections, we also introduced the concept that because of scarcity, economies must make choices regarding how to allocate limited resources among competing uses. Let's see how this is reflected by the PPC model:

1. The economy must choose which combination of goods and services to produce.
2. If the economy is operating at full employment and maximum efficiency, it must select a specific point on the PPC that represents its chosen output mix.

Unemployment of resources

Unemployment of resources occurs when an economy is not using all its available resources efficiently, leading to production levels inside the PPC (such as point F on Figure 1).

1. When resources such as labor, capital, land, or entrepreneurship are underutilized, the economy operates at a point inside the PPC.
2. This underutilization can result from factors like high unemployment of the labour force, inefficient production methods, or unused factories.
3. Reducing unemployment of resources can shift production from inside the PPC to a point on the PPC curve, increasing the production of the economy.

Efficiency

The concept of efficiency is also one of the main concepts reflected by the PPC model:

1. If an economy is producing on the PPC, the economy is operating at full efficiency of resources.
2. Economies producing inside the PPC are inefficient, often due to misallocation of resources. In this situation, the economy needs to maximise the efficiency of its factors of production in order to produce on the PPC and maximise their production possibilities.

Actual growth and growth in production possibilities

Throughout the IB Economics course, we will discover the different types of economic growth an economy can experience. For now, let's look at the two different types of economic growth the PPC model can reflect:

Actual Growth (Short-Term Growth)

1. Actual growth occurs when an economy is producing inside its PPC and it moves closer to or onto its PPC.
2. This growth is typically the result of better resource utilization, reductions in unemployment of resources, or improvements in production efficiency.
3. Actual growth represents the economy maximizing its existing resources without increasing the total resource base.

Growth in Production Possibilities (Long-Term Growth)

The figure below illustrates growth in the production possibilities of an economy:

1. Growth in production possibilities happens when the PPC shifts outward (Figure 3).
2. This expansion reflects an increase in the economy's capacity to produce due to factors like:
   1. Technological advancements.
   2. More labour, land, capital investment, or discovery of new resources.