What is the Production Possibilities Curve?

//What is the Production Possibilities Curve?
What is the Production Possibilities Curve? 2017-10-09T07:25:47+00:00

Definition: The Production Possibilities Curve, also known as the production possibilities frontier, is a graph that shows the maximum number of possible units a company can produce if it only produces two products using all of its resources efficiently.

What Does Production Possibilities Curve Mean?

What is the definition of production possibility curve? In business, the PPC is used to measure the efficiency of a production system when two products are being produced together. Management uses this graph to decide the ideal ratio of units to produce to minimize cost and waste while maximizing profits.

The graph shows the maximum number of units that a company can produce if it uses all of its resources efficiently. Thus, one product’s maximum production possibilities are plotted on the X-axis and the other on the Y-axis. The curve is drawn to represent the number of goods that can be produced using limited resources and a halt in technology at each point.

This downward sloping line represents the trade off between producing product A and product B. As the company diverts more resources to producing product B, the production of product A will decrease. Any point above the curve is unattainable with the given amount of company resources. Any point below the curve represents a production level that isn’t using 100 percent of the company’s resources.

One key assumption the PPC makes is that all resources for production are fixed. This means that the output of product A can only increase if the output of product B decreases.

Another assumption is that technological advances and production improvements are fixed.

Let’s look at an example.

Example

XYZ Company, Ltd is known for producing and selling pens and pencils. Their resources for producing the two products are fixed.

The company can produce 2,000 pencils if it doesn’t produce a single pen. Likewise, it can produce 1,500 pens if it doesn’t produce a single pencil. Currently, it is producing 1,000 pencils and 800 pens.

The company has recently received more demand for pencils, so management decided to increase the production of pencils from 1,000 units to 1,500 units by reducing the output of pens from 800 units to 5oo units. The opportunity cost for producing 1,500 units of pencils becomes the 300 units of forgone pens.

Summary Definition

Define Production Possibility Curve: PPC is a graphical representation of the number of products a company can produce if it uses all of its resources to produce two products.