Production Possibilities Curve :  

The trade-offs facing a society can be illustrated in a graph known as the production possibilities curve. The production possibilities curve shows the maximum quantity of goods and services that can be produced using limited resources to the fullest extent possible. To get a graphical representation of how an economy makes decisions on what to produce, or spend their money on, a Production Possibilities Curve is used. Production Possibilities Curve shows the choices a country can make with respect to its available resources. These resources are land, labor, and capital and entrepreneurship. A production possibilities curve shows that more of one type of a good, or both capital goods and consumer goods, can be produced only by reducing the quantity of other types of goods that are produced. Only one combination of goods and services can be produced at one time.

The points inside the production possibilities curve indicate that resources are not being fully or efficiently used, while points outside a PPC shows an impossible combination implying that there are insufficient resources to produce quantities lying beyond the curve. More resources would have to be obtained, or a more efficient means of production through the development of technology or innovative management techniques would have to be discovered to produce quantities of goods and services outside the current production possibilities curve.

There will be a shift in the Production Possibility Curve when the society is able to produce more output if technology is improved, more resources are discovered, economic institutions get better at fulfilling wants, and economic growth. The PPC moves outward (growth occurs) as the result of Increased resources, larger labor force, change in labor force participation, change in labor-leisure decision, Improved technology (innovation), expansion of capital stock, an improvement in the rules (laws, institutions, and policies) of the economy. The production possibilities curve, however, focuses on productive efficiency and ignores distribution.