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Production Possibilities Curve: Definition & Examples

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  • 0:02 The Production…
  • 0:50 Important Terms
  • 2:13 Examples
  • 3:35 Lesson Summary
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Lesson Transcript
Instructor: Brianna Whiting
In this lesson, we will learn about the production possibilities curve. We'll explore key terms and look at a graph showing how the production possibilities curve functions. The lesson will conclude with a summary and a quiz.

The Production Possibilities Curve

Let's imagine for a bit that you are a farmer. Each year, you grow several different crops. However, inclement weather ruined some of your crops, which put you in a financial bind this growing season. Thus, you must reduce the amount of crops you will grow. While you have your favorites, you know that you need a more reliable way to examine the best possible combination of crops to grow. Therefore, you decide to use a production possibilities curve.

So what is a production possibilities curve? Well, in basic terms, it is a curve on a graph that shows what possibilities an economy has where production is concerned. More specifically, it looks at different combinations of two goods that an economy can produce using certain resources and technology during a specific time frame.

Important Terms

Perhaps to really understand how production possibilities curves work, it is important to explain a few key terms.

First, we must understand opportunity cost, which is what we give up when we choose something else. As mentioned earlier, a production possibilities curve compares two different products. Let's imagine that the two products are cars and houses. If the economy produces more cars, then there are fewer houses produced. The decrease in houses produced is the opportunity cost of producing cars.

Full employment: When production is at its maximum, it will be producing on the actual curve found on a production possibilities graph. Thus, this is a situation when all available resources that are able to be used in the production of goods and services are actually being used: resources are fully employed. So if there is maximum production of cars and houses using all of the available resources and technology, production will create a curve.

Unemployment: Contrary to full employment, unemployment means that an economy is not using all of the available resources and, therefore, production falls inside the production possibilities curve. Another way to look at unemployment is that it tells us when there are available resources to be used that are not being used. When this happens, an economy is not producing at maximum levels.

Example

In order to better understand a production possibilities curve, it is helpful to actually see a picture of one. Here is an example:

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