Lesson preview · What an economy can make
The production possibility curve
~8 min · Free to read
In 2013, about 6 million people in Spain were looking for work and couldn’t find any. That was more than one in four of everyone who was working or looking for work. They could have been building houses, cooking meals or teaching classes. Instead, Spain went without those goods and services. Economists show waste like this, and the choices every country faces, on one simple graph.
Key Term
The production possibility curve
Imagine a small country that makes only two things: phones and wheat. If every worker, field and factory goes into farming, it grows 100 tonnes of wheat and makes no phones. If everything goes into phones, it makes 75 phones and no wheat. It can also make mixes in between, such as 50 phones and 70 tonnes of wheat.
Plot these mixes, where making more of one good means making less of the other, and join them up. You get the production possibility curve (PPC). It shows the most a country can make of two goods, in every mix, with today’s technology. That assumes all its resources are in use and none are wasted. Some books call it the production possibility frontier, because it marks a limit.
Key Term
Three kinds of point
- On the curve: efficient. Nothing is wasted. To get more of one good, the country must give up some of the other.
- Inside the curve: inefficient. Some workers, land or machines are idle or badly used. The country could have more of both goods. Spain in 2013 was inside its curve.
- Outside the curve: unattainable. The country can’t make this mix with the resources and technology it has today.
So the more phones the country makes, the more wheat each extra one costs. That rising opportunity cost (what the country gives up to get each phone) bends the curve outward.
Key Term
Why the curve bows outward
People and land suit some jobs better than others. For its first phones, the country moves the workers and land that suit phones best and farming least, so it loses little wheat. For its last phones, it must move its best farmers off its best fields. If every resource were equally good at both jobs, the cost would never change and the curve would be a straight line.
On 6 February 2023, two very large earthquakes struck Türkiye. They damaged or destroyed homes, schools, hospitals, roads and power lines. Three weeks later, the World Bank estimated the direct damage to buildings, roads and other infrastructure at about 34 billion US dollars. That was equal to 4% of the value of everything the country produced in 2021. The estimate counts what was destroyed, not lost output. The rest of the economy kept growing in 2023.
Key Term
Shifting the curve
In one day, Türkiye lost homes, buildings and roads, so it could make less than the day before: its curve shifted inward. Anything that destroys resources does this.
The curve shifts outward when a country gets more or better resources:
- more people able to work, or more land;
- more capital: machines, buildings and roads made to produce other things;
- more skilled workers, through education and training;
- better technology: new ways of making things.
An outward shift means the country’s capacity (the most it can make) has grown, so it can make more of both goods. This is long-run economic growth. Some books call it potential growth.
So only a change in resources or technology moves the curve itself. Putting idle workers back to work moves the dot towards the curve, so output grows. But the country’s limit stays where it was: once it reaches its curve, only a shift lets it keep growing.
Tip
Drawing it yourself
- Label each axis with one good.
- Draw the curve bowed out from the origin (the corner where the axes meet), touching both axes.
- Mark one point on the curve, one inside and one outside. Label them efficient, inefficient and unattainable.
- For growth, draw a second curve further out, with an arrow from the old curve to the new one.
Trap · Common Misconception
"Inside the curve saves resources for later"
A point inside the curve can look careful, as if the country is keeping something back. It isn’t. A worker’s idle hour this week can’t be stored and used next year. Inside the curve means waste, not saving.
Tip
Consume now or invest for later
Put capital goods (things made to produce other things, such as machines and roads) on one axis. Put consumer goods (things people enjoy now, such as food, clothes and games) on the other. A country that picks more capital goods has less to enjoy today. But its new machines and roads push its curve further out in future. Spending on training works the same way: less to enjoy now, more skilled workers later.
Check yourself · no marks
A two-week strike closes the phones-and-wheat country’s phone factories. A year later, a flood washes away a fifth of its farmland for good. Which event shifts the production possibility curve, and which doesn’t?
Commit to one first. Guessing and being wrong beats reading the answer cold.
Practice · 1 / 7
A country is producing at a point inside its production possibility curve. What does this tell you?
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