Production Possibility Curve

Production Possibility Curve

Production possibility curve is a curve which shows all combination of two good which shows all combination of two goods which an economy could produce with its fuller utilization of available resources and technology.

    Its assumptions are:-

1) The economy can only produce two goods.
2) The level of technology is assumed to be constant.
3) The level of employment is assumed at its maximum.
4) Not every good is eligible for the production of all goods, hence resources are transferred.

Its properties are:-

1) PPC always slopes downward from left to right:-  It is because in a situation of full and efficient utilization of resources production of both goods cannot be increased simultaneously more of one good can only be produced if the other good is reduced.

2) PPC is always concave to the origin:-PPC is concave to the origin due to increasing marginal opportunity cost. Marginal opportunity cost increases because all resources are not equally efficient in the production of all goods. In other words, resources which are efficient in the production of good X are not efficient in the production of good Y.

Suppose there are two goods in economy guns and butter. Let us assume that resources engaged in the production of guns are less efficient in the production of butter, and those engaged in the production of butter are less efficient in the production of guns. Suppose the country is at war and needs the
production of more guns. There is no option but to transfer the resources from butter to gun. Since the resources say workers engaged in the production of butter are less efficient in the production of guns, more and more worker have to be transferred to produce each additional unit of the gun. Thus increasing MOC makes PPC concave to the origin.