A production possibility curve shows the most of two goods that can be made when all resources are fully used. Every point on it is a choice, and moving along it shows opportunity cost.
This lesson is part of economic scarcity and choice. It builds on explaining opportunity cost.
How do you classify a point?
Compare the point with the curve at the same quantity of one good. If the other good is the same as the curve’s figure, the point is on the curve. If it is lower, the point is inside. If it is higher, the point is outside.
| Location | Meaning |
|---|---|
| On the curve | Attainable, resources fully used, efficient |
| Inside the curve | Attainable, but resources idle or used poorly |
| Outside the curve | Unattainable with present resources and technology |
Worked example: a workshop making shirts and trousers
A fictional workshop in Bandar Teratai has these maximum combinations per week.
| Point | Shirts | Trousers |
|---|---|---|
| A | 0 | 100 |
| B | 20 | 96 |
| C | 40 | 84 |
| D | 60 | 60 |
| E | 80 | 0 |
Opportunity cost. Moving from A to B gives 20 more shirts and gives up 4 trousers (100 − 96). Moving from B to C gives up 12 trousers (96 − 84). Moving from C to D gives up 24 (84 − 60), and from D to E gives up 60.
The cost of each extra 20 shirts keeps rising: 4, 12, 24, then 60 trousers. The curve is bowed outward for exactly this reason.
Classifying points. The combination (40 shirts, 60 trousers) is inside the curve, because at 40 shirts the workshop can make 84 trousers. The combination (40 shirts, 100 trousers) is outside, since 100 is higher than 84. It cannot be made with present resources.
What mistakes cost marks?
The usual slip is to read opportunity cost as the quantity gained. Moving from C to D, the answer is 24 trousers given up, not 20 shirts gained.
Another slip is to call an inside point “not allowed”. It is allowed, but wasteful. The third is to explain an outward shift with “people want more”. A shift needs more resources or better technology, such as new sewing machines.
Check yourself
Using the schedule, what is the opportunity cost, in trousers, of moving from D to E? Then say what happens to the curve if the workshop buys faster machines that work for both goods.
Answer
From D (60 shirts, 60 trousers) to E (80 shirts, 0 trousers), the workshop gives up 60 trousers for 20 more shirts.
Faster machines raise the maximum of both goods, so the whole curve shifts outward. The workshop can reach combinations that were outside the old curve, such as 40 shirts and 100 trousers.
What to study next
Read comparing economic systems using stated features to see who decides where on the curve to produce. Then use the scarcity and choice practice set.
The supply and demand diagram reasoning explorer can help you practise reading graphs. To work with a teacher, see online one-to-one Economics tuition.