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
  • Transformation Curve
  • Transformation 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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