Production Possibility Curve

Production Possibility Curve

The problem of choice between relatively scarce commodities due to limited productive resources with the society can be illustrated with the help of a geometric device, is known as production possibility curve. Production possibility curve shows the menu of choice along which a society can choose to substitute one good for another, assuming a given state of technology and given total resources.

The explanation and analysis of production possibility curve is based upon certain assumptions, some of them are following

i.               The time period does not change. It remains the same throughout the curve.

ii.               Techniques of production are fixed.

iii.               There is full employment in the economy.

iv.               Only two goods can be produced from the given resources.

v.               Resources of production are fully mobile.

vi.               The factors of production are given in quantity and quality

vii.               The low of diminishing returns operates in production.

Every production possibility curve is based upon these assumptions. If some of these assumptions changes or neglected, then it affects the nature of production possibility curve.

To draw this curve we take the help of production possibilities schedule, as shown below.

Production possibilities schedule

This schedule suggests that if all resources are thrown into the production of food, a maximum of 500 tons of food can be produced, given the existing technology. If on the other hand, all resources are instead used for producing cars, 25 cars can be produced. In between these two extreme possibilities exist. If we are willing to give up some food, we can have some cars.

We can obtain a production possibility curve by drawing production possibilities schedule graphically. The quantity of food is shown on x-axis and the number of cars is shown on y-axis, the different six production possibilities are being shown as point P₁ P₂ P₃ P₄ P₅ & P₆

Food production

If we assume that innumerable production possibilities exist between any two-production possibilities schedule, we get the production possibility curve P1 to p6. This shows the locus of points of the different possibilities of production of two commodities, which a firm or an economy can produce, with the help of given resources and the techniques of production. Points outside the production possibility (e.g. point p) are unattainable as society’s resources of production are not sufficient to give output beyond the curve. Points lying inside the curve like p1 are attainable by the society but at these points resources production are not fully employed. For example, if society is producing at point p7 then it can increased the production of food keeping the no of cars constant or it can increase the production of cars keeping the food grain output constant or it can increased the output of both the goods simultaneously.

Shift of production possibility curve

The PPC shifts upward or downward due to:

i.               The change in the supply of productive resources and

ii.               The change in the state of technology.

The production capacity of an economy grows overtime through increase in resource supplies and improvement of technology. This enables PPC to shift upward from AE to A1E1 as shown in figure below. This outward shift of the PPC is the basic feature of economic growth.

Uses of production possibility curve

Through the device of PPC can be used for many analytical purposes. We shall discuss below some of its popular uses.

i) The problem of choice

The problem of choice arise because of the given limited resources and unlimited wants, may relate to the allocation of resources between the goods for the higher income group and the lower income group and the goods for the defense and the civilians. Since PPC is the locus of the combination of the goods the problem of choice will not arises when we choose any point on PPC.

ii) The Notion of Scarcity

We can explain the notion of scarcity with the help of PPC. We know that every society possesses only a specific amount of resources, which can produce only limited amount of output even with the help of best technology, Economic scarcity of best fact of life. The production possibility curve reflects the constraints imposed by the element of economic scarcity.

iii) Solution of central problems

The central problems of an economy can be explained with the help of PPC. The solution of problem of what to produce involves the decision regarding the choice of location on the production possibility carves. A production combination represented by any point inside the PPC indicates that the economy is using inefficient methods of production and inefficient combination of resources.