This chapter emphasizes that the production capacity of every country is limited. The production possibilities curve illustrates these limitations. The following illustration depicts six different scenarios for Country A. There are five workers and two products: bread and swords. The number of workers involved in the manufacture of each product differs according to each scenario, resulting in changes in the output of each product. A specific point on the PPC (Production Possibilities Curve) indicates the output corresponding to each scenario.

  • Point A relates to Scenario 1.

  • Point B related to Scenario 2.

  • etc.

The following information (displayed in the transformation curve) applies to each of the scenarios in the illustration:

Work division: States the number of employees working in bread production under the scenario, and the number of employees working in sword production. Keep in mind that there are a total of five employees in the country.

Outputs: Indicates the number of loaves of bread and the number of sword produced in the country under the given scenario. These quantities are also expressed by the basket of good adjacent to the point on the transformation curve that corresponds to the relevant scenario.

Convex Production Possibilities Curve

If the PPC (Production Possibilities Curve) is convex, it means that marginal output increases and marginal cost decreases for each additional item produced.

Straight-Line Production Possibilities Curve

If the PPC (Production Possibilities Curve) is a straight line, it means that marginal cost does not change. The cost of the first item and last item produced are the same. As mentioned earlier, even a straight line is called a curve in economics.