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PRODUCTION POSSIBILITYCURVE

A BASIC TOOL OF ECONOMICS

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The basic economic problem is effectiveallocation 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 ofresoursees among different possible goods

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The nature of this basic problem can bebetter understood with the aid of an

important tool of morden economics iePRODUCTION

POSSIBILITY

CURVE

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ASSUMPTIONS OF PPC

Two types of goods are to be produced- wheat and cloth

There is a given amount of productive resources andthey remain fixed

Fixed resources can be shifted from the production ofone good to another

The given resources are being fully utilized and withutmost efficiency

The technology does not under go any change ie there isno progress in technology

It is a short term analysis

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With the given given

amount of resourcesand a giventechnology weconstruct a table

showing variousproductionpossibilities betweenwheat and cloth

production

possibilties

Clothes(in

thousandmeters)

Wheat (in

thousandquintals)

A 0 15

B 1 14

C 2 12

D 3 9E 4 5

F 5 0

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It is clear from the table and graph that as wemove from possibility A towards F, we draw

away some resources from the production ofwheat and devote them to the production ofcloth.

Thus in a fully employed and technical efficient

economy more of one good can be obtainedonly by cutting down the production of anothergood.

The PPC curve is also called transformation curve

as in moving one point to another on it one goodis transformed into another by transferringresources from one use to the other.

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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 beproducedthan before

When the economy makes progress intechnology ,the PPC will shift to the right and

will indicate the possibility of producing more ofboth goods.

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PPC AND LAW OF INCREASINGOPPORTUNITY COST

The opportunity cost of a commodity means the amountof a next best commodity foregone for producing anextra unit of commodity.

It is clear from the table that opportunity cost goes onincreasing for having extra one thousand meter of cloth.

It is this principle of increaseing opportunity cost thatmakes the PPC concave to origin.

The opportunity cost increases because of the spacificityof resources ie a given resource is more suited to theproduction of one good than another.