Every working day, in mines, factories, offices, construction sites and farms across America, almost 300 million people produce a vast variety of goods and services valued at billions of dollars. Given our unlimited wants and our scarce resources, we are faced with the choice of what to produce and what to consume. Thus, we must choose what combination goods and services to produce, a concept illustrated by the Production Possibilities Curve (PPC). If we want to increase our production of one good, we must decrease our production of something else, in other words we face tradeoffs. The PPC is the boundary between those combinations of goods and services that can be produced and those that cannot.
Like any economic model, the PPC has its constrains and limitations. Firstly, the model focuses on only two goods at a time and holds constant the quantities of all other goods and services produced. Like in any model economy, everything remains the same (ceteris paribus) except for the production of goods we are considering. The PPC constraints consist of a limited period of time, fixed resources and constant technology. .
Thus we are assuming that the production takes place in a limited time interval, that the resources available for production do not fluctuate (no new iron ore has been found or no natural calamities have destroyed the crops of tomatoes used as inputs for a ketchup making company) and that no new technology has been put in place. As we can see, the constraints are quite significant. .
The reason economists put in place such constraints is to make it easier to analyze a particular phenomenon by holding all other variables constant. If this was not so, no clear answer or theory could be made because all the other factors would affect and change the results. By changing one factor at a time and holding all other relevant factors constant, we isolate the factor of interest and are able to investigate its effects in the clearest possible way.
