A production possibilities curve is an economic model. Like other economic models, it simplifies reality so economists can focus on important relationships. A PPC does not show everything that happens in a real business or economy. Instead, it represents the different combinations of two goods or services that can be produced with available productive resources and technology.
The boundary of a production possibilities curve is also called the production possibilities frontier. The frontier represents the maximum combinations that can currently be produced. A point on the frontier indicates that available productive resources are used fully and efficiently. Producing more of one good requires giving up some production of the other. This trade-off reflects scarcity and creates an opportunity cost.
Points away from the frontier also provide useful information. A point outside the frontier represents a combination that cannot currently be produced with the available resources and technology. A point inside the frontier is attainable, but it indicates that some productive resources are unemployed, underused, or used inefficiently. Businesses and economies often work inside their production possibilities frontier. This can happen because of unemployment, production disruptions, or inefficient resource use.
A PPC is based on particular conditions. When economists analyze movement from one point to another along the same curve, they assume that the amount of productive resources and the available technology have not changed. The movement represents a different choice about how existing resources are allocated between the two products.
Economists can analyze these choices using marginal costs and marginal benefits. Marginal means additional. A marginal benefit is the additional benefit gained from a choice, while a marginal cost is the additional cost that results from that choice. On a PPC, moving from one production combination to another can help show this kind of decision-making. Producing additional units of one good provides a benefit, but doing so requires giving up some amount of the other good. The amount given up represents the opportunity cost of the change. Comparing what is gained with what must be given up can help individuals, businesses, and governments make rational decisions about how to allocate limited resources.
In the real world, productive conditions can change. A business might gain workers, buy more capital, find new ways to produce, or use technology to boost productivity. These changes can increase what the business is capable of producing. Productive capacity can also decrease. A business might lose workers, experience a shortage of natural resources, or have equipment or facilities damaged.
When productive capacity changes, the frontier itself may change. Economists can compare production possibilities curves to represent how changes in resources, technology, or productivity affect what is possible. The PPC is useful for examining trade-offs. It also helps analyze how changes in productive conditions affect choices for businesses and economies.