AP® Microeconomics review sheet from Aim for Five (aimforfive.com/micro/units/1/1-3)
Unit 1 · Topic 1.3
1.3 Production Possibilities Curve
A production possibilities curve (PPC) shows the most an economy can produce of two goods with its current resources and technology. Where a point sits tells you about efficiency, the curve's shape tells you about opportunity cost, and a shift in the curve shows growth or loss of resources.
Key terms
- production possibilities curve (PPC)
- efficiency
- increasing opportunity cost
- constant opportunity cost
- economic growth
- unused resources
Reading the graph
Put one good on each axis, for example wheat on the horizontal axis and robots on the vertical axis. The PPC is a curve running from a point on the vertical axis (all robots, no wheat) down to a point on the horizontal axis (all wheat, no robots). It slopes downward because making more of one good means moving resources away from the other.
The model assumes a fixed amount of resources, fixed technology and full use of resources along the curve. It's a simplified picture, but it captures scarcity, trade-offs and opportunity cost on one graph.
| Where the point is | What it means |
|---|---|
| On the curve | Efficient: resources are fully used and you can't make more of one good without making less of the other |
| Inside the curve | Inefficient: some resources are unemployed or wasted |
| Outside the curve | Unattainable for now with current resources and technology |
Opportunity cost and the curve's shape
Moving along the curve shows opportunity cost. If going from 10 to 20 units of wheat means giving up 4 robots, the opportunity cost of those 10 wheat is 4 robots, or 0.4 robot per unit of wheat.
A straight-line PPC means constant opportunity cost: each extra unit of one good costs the same amount of the other. This happens when resources are equally good at producing both goods.
A PPC bowed outward from the origin (concave) shows increasing opportunity cost. As you make more wheat, you have to shift resources that are better at making robots, so each extra unit of wheat costs more robots than the last. This is the usual shape because most resources are specialized: a skilled engineer isn't as useful on a farm as a farmer is.
Less often, a PPC is bowed inward toward the origin (convex). That shows decreasing opportunity cost: each extra unit of one good costs less of the other than the unit before. If a question gives you a curve or table where the cost per unit falls as you move along it, that's the shape to describe.
What shifts the curve
The whole curve shifts outward, which is economic growth, when the economy gets more or better resources or better technology. Examples: population growth, discovering new natural resources, more capital, better education (human capital) or a new production technique.
The curve shifts inward if resources are lost, for example through a natural disaster that destroys factories or a war that reduces the labor force.
If a change helps only one good, the curve pivots. A new technology that only improves robot making moves the curve's endpoint on the robot axis outward, while the endpoint on the wheat axis stays put.
- Unemployment or a recession moves the economy to a point inside the curve. It does not shift the curve, because the resources still exist.
- Choosing to make more capital goods today (like machines) and fewer consumer goods tends to shift the curve outward more in the future.
Efficiency on the PPC
Every point on the curve is productively efficient, since nothing is wasted. But not every point is equally good for society. The point that matches what people actually want most is the allocatively efficient one. The PPC alone can't tell you which point that is; you need information about people's preferences.
Worked examples
Try each one yourself first, then open the solution.
- Example 1Calculator allowed
Calculating increasing opportunity cost
An economy's PPC passes through these points (wheat, robots): A (0, 20), B (10, 18), C (20, 14), D (30, 8), E (40, 0). Find the opportunity cost per unit of wheat for each move from A to E. What shape is the PPC?
Show the solutionHide the solution
- Step 1: A to B: wheat rises by 10 and robots fall by 2. Opportunity cost = 2 ÷ 10 = 0.2 robot per unit of wheat.
- Step 2: B to C: robots fall by 4 for 10 more wheat, so 4 ÷ 10 = 0.4 robot per unit.
- Step 3: C to D: robots fall by 6, so 6 ÷ 10 = 0.6 robot per unit.
- Step 4: D to E: robots fall by 8, so 8 ÷ 10 = 0.8 robot per unit.
- Step 5: The cost rises with each step, so the PPC is bowed outward from the origin.
Answer: 0.2, 0.4, 0.6 and 0.8 robot per unit of wheat: increasing opportunity cost, so the curve bows outward.
- Example 2
Classifying points and changes (classic trap)
Using the same PPC, classify point F (20 wheat, 10 robots) and point G (30 wheat, 12 robots). Then decide whether each event shifts the curve: (a) a recession leaves 10% of workers unemployed; (b) a new seed doubles wheat yields; (c) the economy decides to make more robots and less wheat.
Show the solutionHide the solution
- Step 1: F: at 20 wheat the curve gives 14 robots. F has only 10, so it's inside the curve: attainable but inefficient.
- Step 2: G: at 30 wheat the curve gives only 8 robots. G has 12, so it's outside the curve: unattainable for now.
- Step 3: (a) Unemployed workers still exist, so the economy moves to a point inside the curve. The curve does not shift. This is the trap.
- Step 4: (b) Better seeds raise only wheat output, so the curve pivots outward along the wheat axis; the robot endpoint stays at 20.
- Step 5: (c) Choosing a different mix is a movement along the curve, not a shift.
Answer: F is inside (inefficient); G is outside (unattainable). (a) movement to an inside point, (b) outward pivot on the wheat axis, (c) movement along the curve.
Common mistakes
- Shifting the curve inward for unemployment. Unemployment puts the economy inside the curve; the curve shifts only when the amount or quality of resources or technology changes.
- Computing opportunity cost from total amounts instead of changes. Use the change in the other good divided by the change in this good.
- Shifting the whole curve when a change affects only one good. A technology that helps one good pivots the curve out along that good's axis only.
- Saying trade shifts the PPC. Trade lets a country consume outside its PPC, but its production possibilities stay the same.
On the exam
- Free-response questions often ask you to describe a correctly labeled PPC: both axes labeled with the goods, the curve bowed out (or straight if costs are constant), and specific points marked as efficient, inefficient or unattainable.
- Expect calculation questions that give a table of PPC points and ask for the opportunity cost of one more unit of a good; show the change in the other good divided by the change in this one.
Connected topics
Videos
Check yourself
5 questions on 1.3 Production Possibilities Curve. Pick an answer to see if you got it, and why.
| Point | Robots | Wheat (tons) |
|---|---|---|
| V | 0 | 100 |
| W | 10 | 90 |
| X | 20 | 70 |
| Y | 30 | 40 |
| Z | 40 | 0 |
Hypothetical production possibilities for the country of Varn
The table shows points on Varn's production possibilities curve. What is Varn's opportunity cost of increasing robot production from 20 to 30 robots?
Based on the table, the opportunity cost of each additional robot
Varn currently produces 25 robots and 50 tons of wheat. Which of the following best describes this combination?
Which of the following combinations is unattainable for Varn with its current resources and technology?
If Varn moves from point Z to point Y, what is its opportunity cost per ton of wheat gained?
0 of 5 answered