Production Possibilities Curve PPC as a model of a nation's output | Macroeconomics | Khan Academy

We are now going to study the magical Republic of Fitlandia. As we often do in economics, we're going to assume that Fitlandia, which of course does not exist in the real world, is a very simple country. It helps us create a model for it. Let's say that Fitlandia is capable of producing two goods. It can either produce dumbbells—it's my best picture of a dumbbell right over there—or it can produce protein bars. So, this right over here is a protein bar, or some combination of the two.

So, we can draw Fitlandia's production possibilities curve. Let me write this: PPC—production possibilities curve for Fitlandia. Sometimes this will be referred to as a production possibility frontier. Let me draw two axes: one for dumbbells and one for protein bars. The vertical axis right over there, and then the horizontal axis right over here.

We're going to assume that everything we do is in thousands of tons per year. In the vertical axis, we have one, two, three, four, and five. In the horizontal axis, one thousand tons per year, two thousand tons per year, three thousand tons per year, four thousand tons per year, and five thousand tons per year. Let's put dumbbells in the vertical axis—dumbbells right over here—and let's put our protein bars in the horizontal axis.

Let's say we know that we're maybe the economics minister for Fitlandia or the Secretary of Commerce or something like that. We know that if we put all of our energy into dumbbells and optimally allocate our resources, we could produce—let's say—we could produce four thousand tons of dumbbells in a year.

We also know that, well, if we wanted to produce some protein bars, we're going to have to give up our production of some dumbbells. The more protein bars we produce, the fewer dumbbells we can produce. So, we're going to sit on this curve if we're producing as efficiently as possible, given the resources we have.

If we put all of our resources into protein bars, we could produce three thousand tons of protein bars per year. So, this right over here is our production possibilities curve. If my country is operating fully, operating efficiently, and all of the resources are being used—when I talk about resources, I'm talking about people's time, my labor. I'm talking about the factories being fully utilized, the land, the material—then I would sit someplace on this production possibilities curve.

Sometimes it's referred to as a production possibility frontier because you can't go beyond this unless something changes. We're going to talk in a second about why they change. If you sit on this curve, if you sit someplace on this curve, the country might choose to sit at different points on this curve. This is an efficient use of resources, and it's kind of a theoretical efficiency.

In practice, almost no country can—or really no country can—fully utilize all of its resources where all of its people are working absolutely all of the time. So, in reality, a country might actually sit a little bit below its production possibilities curve, so someplace behind it.

Now, what would happen? Let's say a country right over here—and this is a real—let's just take the theoretical country that somehow is able to operate super efficiently. It's sitting on its production possibility curve or its production possibility frontier.

Let's say it were to enter into some type of a recession, where all of a sudden some of its population isn't able to work, so the labor pool isn't being fully utilized. What would happen to its production? Well, its production would then go—well, would then go off the curve, and it would go down and to the left. So it might end up right over here.

So here, maybe we have some unemployment—unemployment right over here. This is an inefficient use of resources. Maybe Fitlandia gets into a war with another country, and that other country destroys some of their productive capabilities—some of the factories—or maybe some of the people of Fitlandia decide to move someplace else.

What would happen? Well then your production possibilities frontier would actually contract. If you have fewer factories, or if you have a smaller population, or maybe you lose some territory to another country, then you have fewer resources with which to produce. You could end up in a scenario where your production possibilities frontier contracts to something—contracts to maybe something like this.

This movement of the production possibilities curve—this would happen if you have contracting resources. Likewise, most countries, of course, don't want to be in this situation. Most countries want economic growth. Economic growth is when you have expanding resources.

So how can we get beyond this production possibilities frontier? Maybe we want to construct one that is further out. Let's say we want to get a production possibilities frontier that looks something like this. It doesn't have to increase both of the goods proportionately. Maybe we want to get to a production possibilities frontier that looks something like that.

How could we get there? Well, there are a couple of mechanisms. One is you could have more capital. More capital—what do we mean by capital? Well, maybe we invest in creating more factories or getting more technology. So, computer-aided things, robots, whatever—so that we could produce more, either protein bars or dumbbells, per year.

Another possibility is we have more population—more, especially working population. More population. So, the big takeaways here: the production possibilities curve, or production possibilities frontier, for a country are the combinations of goods that it can produce in a certain amount of time if it's using all of its resources completely efficiently.

If it gets into some type of a recession or doesn't use its resources efficiently, then you're going to have a production point—some kind of combination of producing goods that sits under or behind your production possibilities frontier. Maybe there, or there, or there.

As you come out of a recession, you might get again closer to your production possibilities frontier. Now, there are also ways that you can shift the entire frontier. The entire frontier, or the production possibilities curve, can contract if you have contracting resources—factories that are bombed in a war, net outward migration—or your production possibilities frontier can expand if you have more population, more people who could be there to work to produce goods, more capital, more factories, more land, more material with which to produce goods.

You can imagine most countries want to do this. This notion of expanding your production possibilities frontier—this is what we refer to as economic growth.