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Concept of Production Possibility Curve

The document discusses the production possibility curve (PPC), which graphically represents the maximum output combinations of two goods an economy can produce with full employment of resources and a given technology. The PPC is downward sloping and concave in shape. It slopes downward because producing more of one good requires sacrificing units of the other good, as resources are fully utilized. It is concave because the marginal rate of transformation (MRT), or opportunity cost of one good in terms of the other, increases along the curve as resources are not equally efficient in producing both goods. The PPC can shift outward if resources grow or technology improves, allowing more goods to be produced. A point outside the PPC indicates

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393 views4 pages

Concept of Production Possibility Curve

The document discusses the production possibility curve (PPC), which graphically represents the maximum output combinations of two goods an economy can produce with full employment of resources and a given technology. The PPC is downward sloping and concave in shape. It slopes downward because producing more of one good requires sacrificing units of the other good, as resources are fully utilized. It is concave because the marginal rate of transformation (MRT), or opportunity cost of one good in terms of the other, increases along the curve as resources are not equally efficient in producing both goods. The PPC can shift outward if resources grow or technology improves, allowing more goods to be produced. A point outside the PPC indicates

Uploaded by

MOHAMMED DEMMU
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Concept of Production Possibility Curve

Meaning It is a graphical representation of all the possible combinations of two goods that
can be produced by the optimum (fuller) utilisation of available resources and
the given technology.
It gives us the maximum limit of goods and services that could be produced. So,
it is also known as the production possibility boundary or production
possibility frontier (PPF).

Shape of  It is downward sloping from left to right and concave to the point of
PPC origin.

Reason  It is downward sloping because to produce one more unit of resource, we
of have to sacrifice a few units of another one as the resources are already being
Concave fully utilised.
Shape of  Production Possibility Curve is concave-shaped due to increasing MRT, i.e.,
PPC to produce every additional unit of a commodity, more and more units of
another commodity are sacrificed.
 {Reason for increasing MRT: Resources are not equally efficient}

Tabular
Production Capital Agricultural MRT (Change in
Represe
Possibilities goods goods capital
ntation
(in (in units) goods/Change in
units) agricultural goods)

A 15 0 –

B 14 1 1:1

C 12 2 2:1

D 9 3 3:1

E 5 4 4:1

F 0 5 5:1
In the given table, it is shown that, for having agricultural goods, we have to
sacrifice some units of capital goods.
 Initially, when we move from combination A to B to gain one unit of
agricultural goods, we have to sacrifice one unit of capital goods. Further, if we
have to gain one more unit of agricultural goods, then we will have to sacrifice
two, three, four, and five Units of capital goods, respectively.
 In the schedule, it is shown that, for every additional unit of agricultural goods,
the marginal opportunity cost (in terms of loss of output of capital goods to the
gain of agricultural goods) tends to rise.

Shiftin PPC shifts to rightward because of the following reasons.


g of
PPC to  Growth of resources
Right
 Improvement in technology
Diagra
m

Let us Practice

1. PPC is concave-shaped as the production of one good can be increased only by increasing
the production of another good.
a) True
b) False

2. The marginal rate of transformation can be written as


a) Gain – loss
b) Loss × Gain
c) Loss/Gain
d) Gain/Loss

3. ___________________is a graphical representation of all the possible combinations of


two goods that can be produced by the optimum utilisation of available resources and the
given technology.
4. The growth of resources leads to ______________ shift of PPC.

5. A point outside the PPC indicates ____________________

ANSWERS:

1. a) False
2. c) Loss/Gain
3. Production possibility frontier/PPC
4. Rightward
5. Unattainable combination

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