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Production Possibility Curve

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Helna is a postgraduate in Commerce who now working as a Manager and also love sharing informative information with her readers.

Efficient Utilization of Resources.

Production possibility curve indicates various alternatives in the form of a combination of two goods that can be produced with full and efficient employment of given resources and available technology.

Production possibility curve indicates various alternatives in the form of a combination of two goods that can be produced with full and efficient employment of given resources and available technology.

Production Possibility Curve (PP Curve)

The production possibility curve is a curve that depicts all possible combinations of two goods that an economy can produce with available technology and with full and efficient use of its given resources.

Resources to satisfy human wants are not only limited but also have alternative uses. Human wants are unlimited. It is essential to make a choice between alternative uses of available resources. Due to the characteristic feature of scarce resources having alternative uses, there is a maximum limit to the production of goods and services that an economy can produce with full and efficient use of available resources. It demands the diversion of some resources from producing one product to another product to increase the production of one particular goods or service. To increase the output of one product, we have to sacrifice or reduce the production of another product. Available resources can be used to produce various alternative goods which are known as production possibilities. The graph or curve showing the production possibility is called the Production Possibility Curve.

It is very difficult to choose between hundreds and thousands of goods which can be produced from the same resources. Although it can be used to analyze any number of commodities, economists have simplified the analysis by presuming only two goods.

Production Possibility Curve (PP Curve) also knows as Production Possibility Frontier represents different pairs or combinations of two goods that can be produced with an economy given technology and resources.

Production Possibility Curve is drawn on the following four assumptions:

  1. Given resources are fixed.
  2. Given technology remain constant and does not change.
  3. Given resources are used fully and efficiently.
  4. Resources are not equally efficient in the production of all goods.


Production Possibility Curve has two characteristics:

  1. It is downward sloping from left to right.
  2. Production Possibility Curve is concave (curved inwards) to the origin.

Production Possibility Schedule and Curve

Production possibility curve indicates various alternatives in the form of a combination of two goods that can be produced with full and efficient employment of given resources and available technology. Let us assume that with the given resources and technology an economy can produce only two goods, namely Wheat and Rice. The example of two goods is given to facilitate the problem of choosing otherwise same analysis applies to any choice of goods. Various possibilities of production of combination of Rice and Wheat in a hypothetical economy are illustrated in the following Production Possibility schedule and curve.

Production Posibilities or Combination

Wheat (Million Tonnes)

Rice (Million Tonnes)

A

0

15

B

1

14

C

2

12

D

3

9

E

4

5

F

5

0

Production Possibility Curve

production-possibility-curve

Production Possibility Curve Indicates Efficient Utilization of Resources.

Different points on the Production Possibility curve depicting different combinations of two goods are in fact choices that are open to society. If the economy decides to use all its resources in the production of Rice, then the wheat cannot be produced. If the economy decides to use all its resources in the production of wheat then the production of rice will not be possible. These are two extreme possibilities. In between them, there are many other possibilities. The economy can devote a part of its resources to the production of Rice and a part to the production of wheat. Points B, C, D, and E based on the data given in the schedule gives the various combination of two goods. Curve AF indicates the full employment of resources. Any point below or inside the production possibility curve shows the underutilization of resources. Any point above the production possibility curve shows the growth of resources. All points like A, B, C, D E, and F on the Production possibility curve indicates efficient utilization of resources.

Indication of Points Below and Above Production Possibility Curve (PPC)

Any point on PPC indicates full employment and efficient use of resources. The point below PPC shows the inefficient and under-utilization of resources. The point above PPC indicates the growth of technology and resources.

When the economy is producing on the PP curve every point on it like A, B, C, D, E, and F reflects the situation of full and efficient employment of resources. This means resources like labor, land, capital, etc. are not idle. A production possibility curve shows the possibility of an economy in which the full utilization of resources like Land, Labor, capital, and technology can be employed.

Under utilization or Inefficient utilization of resources shows a point below the PP curve. Wrong allocation of land or capital or labor results in under-utilization of resources. A point below the Production Possibility curve denotes that the economy is not fully utilizing its productive capacity.

When the economy is operating at any point above the Production Possibility curve, indicate a situation of growth of resources or improvement of technology. This will enable the economy to grow. The outward or rightward shift of the Production Possibility Curve reflects the growth of resources or the advancement of technology.

Does the production take place only on PP Curve?
It is not necessary that the production takes place only on the PP Curve. When resources are underemployed or inefficiently used, then production does not take place on PP Curve. Improvement of technology and the growth of resources can also be a reason for deviation from the PP Curve.

Movement along a PP Curve from one point to another indicates the change in the combination of two goods produced. More production of one item is possible by the sacrificing of the production of another item. This is the reason for the movement of a point in the Production Possibility Curve.

Why is PPC Downward Sloping?

Production Possibility Curve slopes down from left to right because, in the full employment of resources, production of one item can be increased only after sacrificing some quantity of the other good. In the Production Possibility Schedule given above, we find in the point B the production of 1 million tonnes of wheat is possible by sacrificing 1 million tonnes of Rice. In combination with C, the same amount of wheat is produced by sacrificing 2 million tonnes of rice. As the production of one item (here wheat) increases when the production of another item (here rice) decreases. This is because the resources are limited and the production of both the items cannot be increased at the same time. That is why the Production possibility curve slopes down from left to right as shown above.


Why is the Shape of Production Possibility Curve Concave?


The shade of a production Possibility Curve is concave (curved inwards) due to the increasing marginal opportunity cost. Increasing Marginal opportunity cost means producing an additional item requires the sacrifice of production of another item (i.e. opportunity cost) goes on increasing. Resources specialized for the production of one item will not suit the production of another item. We have seen in the production possibility schedule above, that the production of wheat is possible through the sacrifice of production of rice. Increase in the production of 1 million tonnes of wheat, the sacrifice of production of Rice is increasing successively from 1 million tonnes to 2 million tonnes, the from 2 to 4 million tonnes and so on indicating increasing Marginal Opportunity cost which is technically called the Marginal Rate of Transformation (MRT). AS a result, the shape of PPC becomes concave to the origin.


PPC Has Two Basic Properties:

  1. PP curve is downward sloping and
  2. PP curve is concave to the origin.



Note: PP curve will be a straight line if the sacrifice of units of the other item is constant. i.e. Marginal opportunity cost/MRT is constant. PP Curve will become convex if the sacrifice of units of other items goes on decreasing.

Solution of Central Problems and PP Curve

What to produce?

This problem can be solved by choosing the right combination of the production of two goods. See the production possibility schedule. There are different combinations of two goods like B, C, D, and E. These combinations of production of goods are available to society to choose from. Society has to select one option from the choice. According to its needs society can decide whether they need to produce more rice or more wheat. If the society decided to produce more wheat and less rice, it is likely to choose the combination of E. Likewise, the society is likely to choose the combination of B if the society is interested in producing more rice than wheat. Production possibility curve offers different options to society in the form of various combinations of goods to choose from according to its needs and thus helps solve the problem of 'what to produce'.

How to produce?

Society can produce goods by using techniques that are labor-intensive or capital intensive. If the technique used in the production is obsolete, the economy will operate at some point not on the PP Curve but inside it. It means the available resources are not utilizing in its full capacity. This will encourage the economy to change the technique so as to produce goods at some point on the PP curve itself by making efficient use of its resources. In this way, the PP Curve helps to solve the problem of 'How to produce'.

For whom to produce?

If the combination of goods produced shows an increase in output of necessary goods than luxury goods, it indicates that the taste of common people is being preferred to the needs of rich people. At the same time, if the combination of goods produced shows an increase in output of luxury goods than necessary goods, it indicates the taste of the rich is being preferred to the needs of poor people. Society or economy can make necessary changes to suit the requirement of society. In this way, we can solve the problem of 'for whom to produce'.

This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualized advice from a qualified professional.

© 2012 Helna

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