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FIGURE 1.2-1 The Production Possibilities Curve

Quantity of
The production possibilities curve illustrates coconuts
the trade-offs facing an economy that produces
two goods. It shows the maximum quantity
of one good that can be produced, given the 30 D
quantity of the other good produced. Here, Feasible and Not
the maximum quantity of coconuts that Alexis productively feasible
can gather depends on the quantity of fish she ef cient
catches, and vice versa. Her feasible produc-
tion is shown by the area inside or on the curve. 15 A
Production at point D is not feasible. Produc-
tion at point C is feasible but not efficient 9 B Production
and indicates underutilized resources. Points C possibilities
A and B are feasible and productively efficient, Feasible but curve
meaning resources are fully utilized and the not ef cient (PPC)
only way to make more of one good is to make 0 20 28 40
less of the other good. Quantity of sh

gathering 30 coconuts — isn’t feasible because the economy’s resources and technology
are not sufficient to reach that point.
In Figure 1.2-1, the production possibilities curve intersects the horizontal axis at
40 fish. This means that if Alexis devoted all her resources to catching fish, she would
catch 40 fish per week but would have no resources left over to gather coconuts. The
production possibilities curve intersects the vertical axis at 30 coconuts. This means
that if Alexis devoted all her resources to gathering coconuts, she could gather 30 coco-
nuts per week but would have no resources left over to catch fish. Thus, if Alexis wants
30 coconuts, the trade-off is that she can’t have any fish.
The curve also shows less extreme trade-offs. For example, if Alexis decides to catch
20 fish, she would be able to gather at most 15 coconuts; this production choice is
illustrated by point A. If Alexis decides to catch 28 fish, she could gather at most 9
coconuts, as shown by point B.
Thinking in terms of a production possibilities curve simplifies the complexities of
reality. The real-world economy produces millions of different goods. Even a castaway
on an island would produce more than two different items (for example, Alexis would
need clothing and housing as well as food). But in this model we imagine an economy
that produces only two goods, because in a model with many goods, it would be much
harder to study trade-offs, efficiency, and economic growth.

Efficiency
The production possibilities curve is useful for illustrating the general eco-
An economy is efficient if there nomic concept of efficiency. An economy is efficient if there are no missed
is no way to make anyone better opportunities — meaning that there is no way to make some people better off without
off without making at least one making other people worse off. For example, suppose a course you are taking meets in
person worse off. a classroom that is too small for the number of students — some may be forced to sit
on the floor or stand — while a larger classroom nearby sits empty. Economists would
say that this is an inefficient use of resources because there is a way to make some people
better off without making anyone worse off — after all, the larger classroom is empty.
The school is not using its resources efficiently. When an economy is using all of its
resources efficiently, the only way to make one person better off is to change the use of
resources in a way that makes someone else worse off. So in our classroom example, if
all larger classrooms were already fully occupied, we could say that the school was run
in an efficient way; your classmates could be made better off only by making people in

12 Macro • Unit 1 Basic Economic Concepts
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