Using the Production Possibility Curve to Illustrate Economic Conditions

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  • 0:02 Production Possibility Curve
  • 0:36 Scarcity
  • 1:16 Factors of Production
  • 2:10 Economic Efficiency
  • 4:33 Opportunity Cost
  • 5:12 Lesson Summary
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Lesson Transcript
Instructor: Beth Loy

Dr. Loy has a Ph.D. in Resource Economics; master's degrees in economics, human resources, and safety; and has taught masters and doctorate level courses in statistics, research methods, economics, and management.

This lesson explains the economic concept of the production possibility curve, which is used to illustrate conditions and make good business decisions. Trade-offs, economic efficiency, economic inefficiency, and economic growth are explained.

Production Possibility Curve

Many economic decisions are based on how much a producer can produce with a limited number of scarce resources. Given the situation, what can we produce in the most efficient manner? To complicate our decision-making, the resources we need for production are scarce, and there are trade-offs we have to balance in order to help us make the most profitable decisions.

In this lesson, we look at scarcity, factors of production, the production possibilities curve, and opportunity cost to help us analyze trade-offs, economic efficiency and inefficiency, and economic growth.

Scarcity

In economics, we look at the choices we make given the resources we have, and many of those resources are scarce. Scarcity means that we do not have enough of a good or a service to meet all of the demand. Goods are things that we value, like cars, food, and medication. Services are the acts that others perform that we value, like providing medical care, teaching college, and maintaining emergency services.

Because goods and services are limited, a producer needs to know how much to produce, who to produce for, and how to produce given certain factors of production. All of these production decisions involve trade-offs.

Factors of Production

Factors of production are the inputs we need to produce our goods and services. These are the labor, capital, and natural resources, such as land, available for production. Labor is the effort used by workers to produce goods and services. Capital describes the goods used to produce other goods and services. Natural resources are the things from nature that can be used for production. We want to use these factors of production to find our highest level of economic efficiency.

Factors of production come in many shapes and sizes. For example, the factors of production to provide medical services include:

  • Labor - doctors, nurses, and other staff
  • Capital - hospitals, computers, and medical devices
  • Natural resources - land and fuel

Given these factors of production, we would need to find the most economically efficient way to produce medical services.

Economic Efficiency

How we use factors of production can be illustrated with a production possibilities curve. This helps us visualize how our resources are distributed.

The points along the curve are points where nothing additional can be produced given the factors of production we have. Economic efficiency is where the production for one good or service cannot be made better off without reducing another. These are the points on the production possibilities curve.

All other points off of the curve demonstrate points of economic inefficiency, a situation where the factors of production can be used differently to produce more of a good or service.

Goods Versus Services Example

Let us assume, for illustration, that we are in a simple economy made of two outputs, medical services and pools. The production possibilities, given only these two outputs, can be graphed along a curve, called a production possibilities curve. The production possibilities curve graphs all of the production possibilities of our two outputs, medical services and pools, given the factors of production and the available technology.

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