A production possibility curve (PPC) shows the most of two goods an economy can make with its resources. A movement along it means reallocating resources between the goods, and the lost output of one good is the opportunity cost of the gain in the other.
This lesson applies opportunity cost and the productive resources to a model. It sits in scarcity, choice and opportunity cost.
What do the points mean?
- On the curve: resources are fully and efficiently used.
- Inside the curve: some resources are unemployed or wasted, so output is lower than possible.
- Outside the curve: unattainable with current resources and technology.
How to explain a movement, step by step
- Read the two points as pairs of numbers: (boats, rice).
- Find the change in each good by subtracting.
- Name which good is gained and which is given up.
- Divide the amount given up by the amount gained to get the opportunity cost per unit.
- Write the sentence: “Producing X more units of A costs Y units of B.”
Worked example
Tanjung Island is a fictional economy that makes only fishing boats and rice. Its PPC data:
| Point | Boats | Rice (tonnes) |
|---|---|---|
| A | 0 | 60 |
| B | 10 | 56 |
| C | 20 | 48 |
| D | 30 | 36 |
| E | 40 | 20 |
| F | 50 | 0 |
Move from C to D. Boats rise from 20 to 30, a gain of 10. Rice falls from 48 to 36, a loss of 12 tonnes.
Opportunity cost = 12 tonnes of rice for 10 boats = 1.2 tonnes of rice per boat.
Now compare it to the move from A to B: 10 boats cost 4 tonnes of rice, which is 0.4 tonnes a boat. Later moves cost more:
| Move | Extra boats | Rice lost (tonnes) | Cost per boat (tonnes) |
|---|---|---|---|
| A to B | 10 | 4 | 0.4 |
| B to C | 10 | 8 | 0.8 |
| C to D | 10 | 12 | 1.2 |
| D to E | 10 | 16 | 1.6 |
| E to F | 10 | 20 | 2.0 |
The rice losses add up: 4 + 8 + 12 + 16 + 20 = 60 tonnes, which is all the rice at point A. The cost per boat rises each time, which is increasing opportunity cost. The reason is that the most productive rice workers and land are not the most productive boat builders, so moving them costs more rice each time.
A point inside the curve. Suppose Tanjung produces 20 boats and 40 tonnes of rice. At 20 boats the curve allows 48 tonnes, so this point is inside. Unused workers or idle land might explain it. Moving to C raises rice by 8 tonnes without giving up any boats, so the opportunity cost of that move is zero.
The mistake to watch for
Mistaken answer: “Moving from C to D costs 36 tonnes of rice.”
The student gave the rice produced at D, not the rice lost in the move.
The cost is the change, not the level: 48 to 36 is a loss of 12. Another slip is saying that a point outside the curve could be reached “if people work harder”. Working harder uses the same resources more fully, which only gets you onto the curve.
Check yourself
1. Using the table, what is the opportunity cost per boat of moving from D to E?
Show answer
Boats rise by 10 (30 to 40). Rice falls from 36 to 20, a loss of 16 tonnes. Cost per boat = 16 ÷ 10 = 1.6 tonnes of rice.
2. Tanjung is at 30 boats and 30 tonnes of rice. Where is this point, and what does it show?
Show answer
At 30 boats the curve allows 36 tonnes, so 30 tonnes is inside the curve. Resources are not fully used, so output is below its potential.
3. Can Tanjung produce 20 boats and 55 tonnes of rice with its current resources?
Show answer
No. At 20 boats the maximum is 48 tonnes. The point lies outside the curve and is unattainable.
Where this leads next
Next, see what happens when the whole curve moves outward, in interpreting an outward shift without claiming all groups benefit. The percentage-base explorer helps when a question gives growth in output as a percentage.
Students often get the arithmetic right and lose marks on the explanation sentence. In online one-to-one Economics tuition, our teachers practise that sentence structure with new numbers each time.