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1.4 Notes

The Production Possibility Curve (PPC) illustrates the maximum combinations of goods and services that an economy can produce with full resource utilization. Points on the curve represent efficient production, while points inside indicate inefficiency and those outside are unattainable. Shifts in the PPC can occur due to technological advancements or resource changes, indicating economic growth or decline, respectively.

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26 views2 pages

1.4 Notes

The Production Possibility Curve (PPC) illustrates the maximum combinations of goods and services that an economy can produce with full resource utilization. Points on the curve represent efficient production, while points inside indicate inefficiency and those outside are unattainable. Shifts in the PPC can occur due to technological advancements or resource changes, indicating economic growth or decline, respectively.

Uploaded by

Devansh.T.Rathod TIPS
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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UNIT 1 – THE BASIC ECONOMIC PROBLEM

1.4 – PRODUCTION POSSIBILITY COST (PPC)

Central problems of an economy can be better explained or understood with the help of an
important tool of modern economics known as Production Possibility Frontier (PPF) or
Production Possibility Curve (PPC).

A production possibility frontier is a diagrammatic presentation which shows the maximum


number of alternative combinations of goods and services that a society can produce at a
given time when there is full utilization of economic resources and technology. There is a
maximum limit at which goods and services can be produced with given resources and
technique of production. If we want to increase the production of a particular commodity, in
this situation, we have to reduce the production of some other commodity. It is in this sense
PPC is called ‘Transformation Curve’.

Alternative possibilities Guns (thousands) Butter (millions)


A 0 20
B 2 18
C 5 14
D 9 6
E 10 0

The table above presents alternative combinations of gins and butter for the economy. In
choosing what to produce, decision makers have a choice of producing. For example,
alternative C, 5000 guns and 14 million units of butter or any of the alternatives. This
Production Possibility schedule is plotted in the figure below. The curve, labelled PP, is the
Production Possibility Curve. The points A, B, C, D and E on the PPC represent the position
of full employment of the economy’s resources and full use of its technology.

Figure 1.3.1
Points on the PPC are efficient, within the frontier are inefficient and points outside the
frontier are unattainable. For example, points C and D on the PPC are efficient because all
available resources are utilized and there is full use of existing technology. Any point outside
the PPC, such as point K in the figure 1.3.1, is unattainable. Any point within the PPC is
inefficient because some resources are either unemployed or underemployed, or employed at
tasks that do not fully utilize the production capability of the resource.

Shift in PPC

The economy can sometimes produce more of all goods as a result of the advancement of
technologies and expansion of resources. This means that the economy is able to produce
more of the commodities than before (economic growth). In such a case, PPC shifts to the
right. This is shown by the new production possibility line FG in figure 1.3.2. On the other
hand, if there is a decrease in the capacity of production of the economy due to natural
calamities, depletion of resources, out-dation of technologies, etc the production possibility
curve shifts leftward, from PP to AE (under-utilization of resources).

Figure 1.3.2

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