PRODUCTION POSSIBILITY CURVE /PPC
Production possibility Curve is a curve which depicts all possible
combinations of two goods which can be produced with given resources
and technology in an economy.
It is also known as Production possibility frontier or transformation curve.
The concept of PP curve is based on the following assumptions:
1. First, the amount of resources in the economy is fixed.
2. Second, the technology is given and unchanged.
3. Third, the resources are efficient and fully employed.
4. Fourth, all the resources are not equally efficient in production of all goods
Production Possibility Frontier Schedule and Curve
It helps us to understand and solve the problem of what to produce and in what
quantity.
Let us for the sake of simplicity assume that with given resources and technology, an
economy can produce only two goods, namely Rice and Tanks as shown in the
production possibility schedule.
By plotting the data, we get the following PP Curve:
Tank is measured on the vertical axis whereas Rice is measured on the horizontal axis.
If the economy decides to use all its resources in the production of Tanks, OA quantity
of Tanks will be produced but Rice cannot be produced. On the other hand, if resources
are devoted exclusively to the production of Rice, OF amount of Rice will be produced
but no Tanks can be manufactured.
These two are extreme possibilities. In between, there are many other possibilities.
Another alternative is that the economy devotes a part of its resources to the
production of Tanks and a part to the production of Rice. In that case there can be
different possibilities of production as is indicated by the points B, C, D and E. By joining
points A, B, C, D, E and F of a curve, we get the Production Possibility Curve.
Full Employment and Underemployment Under PP Curve
(i) Full Employment of Resources: It is represented along the PP-curve. The
economy has to decide which combination of good X and good Y should be
produced. It means that the economy has to decide how resources should be
allocated in the production of good X and good Y. The desired allocation of the
two goods must lie somewhere on the PP curve. For example, point A on the PP
represents one such allocation.
ii) Under Utilization of Resources: If resources are not fully and efficiently
employed, may there be a problem of under utilization of resources. Under
utilization of resources arises because of unemployment and inefficiency.
● The Problem of Unemployment: If the actual combination of two produced
goods lies below the PP curve, it means that the resources are not fully
employed. If the resources are fully employed, the combination must lie
somewhere on the PP curve. For example, the combination ‘U’ below the PP
curve represents unemployment, i.e., the resources are not fully utilized.
● The Problem of Inefficiency: Assuming that the resources are fully efficient, and
if the actual combinations, say I, produced still lies below the PP curve, it means
that resources are inefficiently employed. So, any combination that lies below the
PP curve also indicates the problem of inefficient utilization of resources.
Rightward and Leftward Shift of PP Curve
(i) Rightward Shift (When both Intercept Changes)
● When Resources Increase: Production possibility curve shows the
combination of two pieces of goods which can be produced-by utilizing
the resources efficiently.
● For example, Discovery of oil reserves in the GULF countries has caused a
substantial shift to the right in the PPC of these countries.
● When Technology Changes: Generally, the change in technology is for the
better. Better technology means that more quantities of both goods can be
produced. In this situation also the PP frontier shifts upwards.
(ii) Rightward Rotation (When One intercept Changes):
● It is due to the improvement in technology, takes place only in one good, good X.
There is no improvement in the technology of producing the good Y.
● Thus, more quantity of good X can be produced. Production possibility curve PP’
expands to PP’ showing economic growth. Similarly for good Y.
2.Leftward Shift:
● When Resources Decrease: Resources with the society may decrease due
to unusual happenings like earthquakes, war, natural calamities like floods
etc. In such situations the production capacity of the country decreases,
and the PP frontier shifts downwards.
● Opportunity cost has occupied a very important place in economics.
● Modern economists have used the concept of opportunity cost in allocation of
resources besides other fields.
● What is given up for getting something is called the opportunity cost of that
thing. For instance, theoretically if a consumer has to forgo 2 cups of tea for
getting one glass of orange juice, the opportunity cost of one glass of orange
juice will be 2 cups of tea. Thus opportunity cost of any commodity is the
amount of other goods which has been given up in order to produce that
commodity. Alternatively, the opportunity cost of a given activity is the value of
the next best activity.
Marginal opportunity cost is an addition to a cost in terms of a number of units of a
commodity sacrificed to produce one additional unit of another commodity.
Marginal rate of transformation :( MRT) is the ratio of the number of units of a
good sacrificed to produce one additional unit of another commodity.
● PPC is concave to the point of origin because of increasing marginal
opportunity cost (MOC)
For example a particular good (say, guns), is transferred to the production of another
good (say, rice) for which they are less productive or less specialized. Thus, transfer of
resources from more productive to less productive uses indirectly means fall in their
productivity, with the result more of such resources are needed to produce an
additional unit of the other commodity. Thus marginal opportunity cost goes on
increasing making the PP curve concave in shape.
Properties or Characteristics of Production Possibility Curve
1. PPC is downward sloping: The downward slope of PPC means that if the
country wants to produce more of one good, it has to produce less
quantity of the other goods.
2. PPC is concave to the point of origin: Concave shape of PPC implies that
slope of PPC increases. Slope of PPC is defined as the quantity of good Y
given up in exchange for an additional unit of good X.
