Production possibility curve. (PPC)
The production possibility curve is a model used to show the output possibilities of an economy.
While a real economy produces hundreds of thousands of goods and services we use this simplified model to show the relationship in the opportunity cost of things and also demonstrate the capacity of the economy.
In the diagram we have production possibility curve for 2 products DVD players and microwave ovens.
The blue line represents all combinations of both products that could be produces simultaneously in an economy.
(Insert diagram here)
At point A in the diagram you could produce 2000 microwave ovens and 700 DVD players. The opportunity cost of producing the 2000 microwave ovens are the 300 more DVD players that could be produced if not for diverting resources for the production of the microwave ovens. The same could be said for 1000 more microwave ovens that could be produced if not for the production of 700 DVD players. In economics we call this the opportunity cost. (Hyper link to all pages with this word)
At point B we see that 1000 microwaves could be produced while producing 300 DVD players. At this point we see that there is opportunity to produce more of both products since we are well within the PPC we call this under production.
If we wanted to produce the combinations of both products at point D it is not possible with the resources available or utilized at the moment. This however is probable not be a permanent situation. Better technology , more land, labour and capital could result in the production possibility curve expanding on both horizons that far exceeds current production capacity. In economics we call this positive economic growth.
The Supply curve is represented going upwards as price increases. As the price consumers are willing to pay for any goods or service increase, the quantity producers are willing to supply increases. The incentive for the suppliers are selling more goods at higher prices(therefore increasing profit). In this example the suppliers are willing to supply 200 quantity of x for the price of $20, but as the price increase there is a greater interest and therefore they are willing to supply 300 units of x for $25 ; 400 units of X for $ 50 and 500 units of x for $100.
