PRODUCTION POSSIBILITY CURVE

A BASIC TOOL OF ECONOMICS

The basic economic problem is effective allocation of scarced and limited resources So economy has to choose between different goods It has to be decided which goods are to be produced more and which ones less Economy has to decide about allocation of resoursees among different possible goods

The nature of this basic problem can be better understood with the aid of an important tool of morden economics ie PRODUCTION POSSIBILITY CURVE

ASSUMPTIONS OF PPC

Two types of goods are to be produced- wheat and cloth There is a given amount of productive resources and they remain fixed Fixed resources can be shifted from the production of one good to another The given resources are being fully utilized and with utmost efficiency The technology does not under go any change ie there is no progress in technology It is a short term analysis

With the given given production amount of resources possibilties and a given technology we construct a table A showing various B production possibilities between C wheat and cloth D
E

Clothes(in thousand meters)

Wheat (in thousand quintals)

0 1 2 3 4

15 14 12 9 5

It is clear from the table and graph that as we move from possibility A towards F, we draw away some resources from the production of wheat and devote them to the production of cloth. Thus in a fully employed and technical efficient economy more of one good can be obtained only by cutting down the production of another good. The PPC curve is also called transformation curve as in moving one point to another on it one good is transformed into another by transferring resources from one use to the other.

ECONOMIC GROWTH AND SHIFT IN PPC

If the productive resources expand or increase, the PPC will shift outward and to the right showing that more of both goods can be producedthan before When the economy makes progress in technology ,the PPC will shift to the right and will indicate the possibility of producing more of both goods.

PPC AND LAW OF INCREASING OPPORTUNITY COST

The opportunity cost of a commodity means the amount of a next best commodity foregone for producing an extra unit of commodity. It is clear from the table that opportunity cost goes on increasing for having extra one thousand meter of cloth. It is this principle of increaseing opportunity cost that makes the PPC concave to origin. The opportunity cost increases because of the spacificity of resources ie a given resource is more suited to the production of one good than another.