Interpreting the Production Possibilities Curve

Inefficient, Efficient, or Impossible?

If you are a student in BBA2401-macroeconomics, you will find a test question coming from the below topic.

The production possibilities curve shows the effects of scarcity and choice in the economy as a whole. Three situations can be distinguished in figure 2, depending on whether if the production is in the shaded area, on the curve, or outside the curve.

First, imagine production at point I. This point, with 100 movies and 18,000 computers, is inside the curve. But the production possibilities curve tells us that it is possible to produce more computers, more movies, or both with the same amount of resources. For example, a talented movie directors may be working on a computer assemmbly because her short film was not yet been seen by studio executive, or perhaps a financial crisis has prevemted companies from getting loans and thus all production of computer chips.

As you can see, points inside the curve, like point I, are inefficient because the economy could produce a larger number of movies, as point D, or a larger number of computers as at point B. Points inside the production possibilities curve are possible, but they are inefficient.

Second, consider the points on the production possibilities curve. These points are efficient. They present the maximum amount that can be produced with available resources. The only way to raise the production of one good is to lower production of the other good. The points on the curve shows a tradeoff between one good and another.

Third, consider points to the right side and above production possibilities curve, like point J in Figure 2. These points are impossible. The economy does not have the resources to produce those quantities.