Economists use the production possibilities curve to analyse full employment and full production. This curve shows the relationship between two outputs as a result of the maximum usage of inputs, which includes employment. However, full employment, full production and the production possibilities curve are purely hypothetical concepts that are difficult to measure and define in the real world.
The Production Possibilities Curve
The production possibilities curve is a concept in macroeconomics that illustrates the relationships between two outputs in a hypothetical economy. Of course, most economies produce more than two outputs, but by considering only two, the relationship between resources and technology becomes easier to understand. The model is therefore more theoretical than applied. One output on the x-axis and the other on the y-axis maps the quantities of both outputs. The curve, convex to the origin, can show various results, such as all of one output, and none of the other, a little of one but much of the other, or equal quantities of both.
Any point on the production possibilities curve represents an economy at the full level of production. At the current level of technology and resources, this means that there can be no increase in output of one product without a reduction in the output for the other product. Any point outside the production possibilities curve (that is, on the opposite side of the graph's origin) is technically unattainable. Any point that lies on the inside of the production possibilities curve signifies a point where the economy is not using its resources to their full potential.
If an economy is operating on the production possibilities curve, and is thus operating at full production, it will use all resources fully. In macroeconomics, there are two groups of resources: capital and labor. Capital refers to machinery, agricultural land, buildings and vehicles among other things. If both capital and labor are operating at their furthest extent, full employment must equate to full production. However, the concept of full employment is not relevant in the real world, as there are natural levels of unemployment in most economies. For example, people may be between jobs, may take time off to travel or may not wish to work.
The concepts of full production and full employment on the production possibilities curve are purely theoretical and are therefore difficult to apply to the real world. However, many economists use the natural level of unemployment as a measure of full employment. It is hard to know if this level of employment does actually mean full production because it is difficult to measure the full use of capital. Furthermore, increases in output, or GDP, may not only be a result of an increase in production but also an increase in technology or labor productivity.