PRODUCTION POSSIBILITY CURVE (PPC)

PRODUCTION POSSIBILITY CURVE (FRONTIER)

It is a curve or graphical representation which shows the various combinations of two goods which a country can produce given that its available resources are full employed and efficiently utilized. The resources can be used to produce various alternative goods. But as a result of scarcity, choice has to be made between the alternate goods that can be produced. If it is decided to produce more of a certain goods; the production of the other goods has to be reduced. It is assumed that the economy can produce only two goods given his limited resources.

The assumptions of Production possibility curve are as follows;

Ø Only two goods good X and good Y are produced in varied proportion in the economy.

Ø The same resources used in the production of good X can be also used for the production of good Y.

Ø All available resources are fully employed.

Given these assumptions, a hypothetical production possibility schedule of the concerned economy is depicted in table 1.1

Table1.1 Production Possibility Schedule

Product Combination	Quantity of goods  X	Quantity of Goods Y	MRTxy
P	0	250	0
B	100	230	-1/5
C	150	200	-3/5
D	200	150	-1
P1	250	0	-3

The Law of Increasing opportunity cost

 

In Table1.1, it is shown that as more of good X is produced; less of good Y is produced successively leading to increasing opportunity cost (0,-1/5,-3/5,-1,-3). That is more resources are allocated towards the production of X, while the resources which are to be allocated to good Y are withdrawn.

The law of increasing opportunity cost state that given two goods produced in an economy, as more of a goods is being produced the more its opportunity cost increases. That is as production increases, opportunity cost increases. Production is directly proportional to opportunity cost.

The production possibility schedule illustrated in the table above (table 1.1) is graphically shown in the graphical illustration (figure 1.1) below.

Figure 1.1

Ø Scarcity: the boundary which is formed by the curve P and P1 indicates the maximum amount of goods that can be produced as a result of limited resources. If there are more resources available, then the boundary formed by the curve would have increased to the right.

Ø Full employment: All available resources are fully employed in the production of good X and Y forming the Boundary P and P1. There are no resources which is left unemployed.

Ø Unachievable output level:  The point outside the boundary point K, implies output level which cannot be achieved as a result of limited resources.

Ø Unemployment/underemployment: The point inside the boundary point R, implies that there are unused resources (unemployment) or resources are not efficiently utilized (underemployment).

Ø Marginal rate of transformation (MRT); It is the rate at which one good must be sacrificed in order to produce another good, assuming that both goods requires the same scarce resources. It is also a measure of opportunity cost.