What Are Production Possibility Curves?

A "Production Possibility Curve" is the graphical representation of the "Production Possibilities Frontier," which shows the different rates at which two goods can be produced with only a particular amount of resources.

What It Looks Like Graphically

1. Imagine a graph with a Y-axis and an X-axis (a vertical and a horizontal axis, respectively). A Production Possibility Curve will like look something like the mirror image of the letter "C" drawn on the graph.

Example

2. Consider this: Sally wants to bake muffins and cookies, but she only has one oven to bake them both in. Any area of the oven that she uses to bake cookies is necessarily not used to make muffins. Thus, for every cookie baked, fewer muffins are baked. Expressed on a graph, with cookies on the Y-axis and muffins on the X-axis, for every muffin Sally baked, she would end with fewer cookies. This is the production possibilities frontier, and it is expressed graphically as a "production possibilities curve."

Significance

3. There are few concepts with greater central importance in the field of economics. At the heart of economics is the recognition that any action has a cost. Everything is a trade-off. When you go to the store, you have a limited amount of money available to acquire the goods you want. Thus, you are faced with the production possibilities curve on a daily basis.

The Production Possibilities Curve Used in Practice

4. The production possibility curve figures somewhat differently in the fields of microeconomics and macroeconomics. In microeconomics, it is used to measure how a household might allocate resources. In macroeconomics, it is used to describe different types of economic efficiency pursued by nations.

Limitations

5. Mathematically, the production possibilities curve is perfect, expressing the real physical limitations of how various resources can be spent. However, as a mathematical tool, it is built to handle quantitative concepts, not qualitative ones. Yet, this is a general limitation of mathematics more than it is a limitation of the curve itself. For example, anthropologists are better equipped to understand complex social variables like culture, despite the fact that mathematicians are better equipped with precise conceptual tools.

The Future

6. As social scientists become increasingly capable to express complex social phenomena such as culture, emotions, and human psychology more quantitatively, the production possibility curve will have a greater role in helping us understand how humans interpret, understand, and exist in the world. Dan Ariely, a behavioral economist at the Massachusetts Institute of Technology, attempted something just like that in his book "Predictably Irrational".