Production Possibility Curve
Published On : 2019-07-30
Production Possibility Curve
Production Possibility
Curve: It is the graphical representation of how much of two goods an
economy can produce with given resources.
Synonyms of Production
Possibility Curve- Production Possibility Frontier
- Production Possibility Boundary
Assumptions of PPC- The resources are in fixed amount
- Only two goods can be produced.
- The resources are fully utilized.
- Technology remains constant.
- Resources can be used to produce either of two goods.
Production Possibility Schedule
|
Possibility
|
Good X
|
Good Y
|
|
A
|
100
|
0
|
|
B
|
80
|
20
|
|
C
|
60
|
40
|
|
D
|
40
|
60
|
|
E
|
20
|
80
|
|
F
|
0
|
100
|
The table above shows that an
economy can produce any possibility among A to F but one good has to be
sacrificed to produce another. This concept is called Opportunity Cost.
Opportunity Cost:
The amount lost of one good for the gain of other is called opportunity cost.
It can be best defined as “next
best alternative sacrificed”
MOC = Gain of X / Loss of Y
Points A, B D & F show that
the resources are fully utilized. Point C shows underutilization of resources
and Point E shows impossible combination.
MRT – Marginal Rate of
Transformation
It is the ratio of change in two
goods due to sacrifice of either of them
MRT = ∆X / ∆Y
CHARACTERISTICS OF PPC
It is always downward
sloping to right. The reason behind the downward slop of ppc is
that more production of one good is
related to less of other good and it creates an inverse relation among two
goods so, either is can be increased vertically or horizontally.
It is concave to the
origin. It looks concave
because of increasing marginal cost. It means addition to one unit increases
sacrifice of other unit. If the sacrifice of other goods is constant, PPC would
be a straight line.
Shift in PPC
There can be two types of shifts
in PPC, rightward and leftward and it happens due to increase or decrease in
resources.
Rightward shift in PPC
Leftward shift in PPC
PPC shifts to right because of
the following reasons:
- When resources increase or grow, more of the two
goods can be produced and more PPC shifts to right.
- When technology improves of both goods, more of the
two goods can be produced and more PPC shifts to right.
PPC shifts to left because of
the following reasons:
- When resources decrease, less of the two goods can be
produced and more PPC shifts to left.
- When technology worsens of both goods, less of the
two goods can be produced and more PPC shifts to left.
Rotation in PPC
PPC curve rotates in two ways;
vertically or horizontally as technology of one goods improves and other
remains constant.
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