In economics, a production possibilities curve is a graphical model that shows the trade-offs facing an economy with a given level of production technology and finite resources. While this model greatly simplifies the actual workings of a national economy, it effectively demonstrates the core causes of production limitations and the difficult choices that societies face due to those limitations.
The production possibilities curve model assumes a simplified economy with a fixed amount of production technology and limited raw materials and labor, which is basically true of all economies under a very short time horizon. This model also assumes that the economy can only produce two types of goods. In the model, the quantity of the two goods produced are plotted on a graph.
Utilizing all of the economy’s resources to produce the first commodity results in a limited quantity of goods, say 100 units. Utilizing all of the economy’s resources to produce the second commodity also results in a limited quantity, say 50 units. Due to resource limitations, the maximum amount of each commodity cannot be produced at the same time. Instead, a portion of the available resources can be dedicated to one product and the remainder to the other.
By dedicating varying portions of the economy’s resources to each commodity, the production possibilities curve for the economy can be plotted to form a curve on the graph. The curve shows that in order to get more of one product, the economy must give up some amount of the other product by shifting available resources.