The fact that resources, including raw materials, are scarce and limited in nature, producers are often faced with the question of, “What to produce?” and “How much to produce?” Typically, such a problem is solved by allocating available resources in a way that helps to meet consumer’s demand effectively and in turn, generate substantial profits. However, the key to achieving it depends on producers’ ability to use an ideal combination of resources and figure out ways to lower wastage on all production aspects.
During their planning stage, several producers and manufacturers rely on well-crafted diagrams and charts to analyse and in turn, solve the problem of choice and resource allocation. Notably, Production possibility curve is one such medium that offers a fair idea about the feasible production goals and then proceeds to offer an insight into the favourable combination of resources.
With that piece of information, are you all set to delve into detail about the production possibility curve in economics?
What is the Production Possibility Curve?
As per the production possibilities curve definition, it is a graphical representation of all possible combinations of any two specific goods which can be produced in an economy. Further, the analytical tool explains and addresses the problem of choice that allows producers to solve them effectively. Additionally, it helps producers keep track of the rate of transformation of a specific product into another in a situation wherein the economy shifts from one position to another.
In such a graphic tool, the maximum manufacturing capacity of a particular commodity is arranged on X-axis, and that of other commodity is arranged on Y-axis. The curve obtained tends to represent the number of products that a manufacturer can create with the limited resources and technology available at hand.
To further understand this concept, one needs to take a look at a production possibilities curve example. However, before finding that out, one needs to become familiar with assumptions of the PPC curve.
Check Your Progress: Before moving onto the next level, try to define the production possibility curve in your own words and provide suitable examples.
What are the Assumptions of the Production Possibility Curve?
Let’s glance through the assumptions on which the production productivity curve rests –
Only two specific goods, namely, ‘X’ (consumer goods) and ‘Y’ (capital goods), are widely produced in an economy in different proportions.
The same combination of resources can be used for producing either one or both of the goods and can be freely shifted between them.
The supply of resources is fixed but can be reallocated to produce both goods but within feasible limits.
All resources and available technology in the economy is optimally allocated and used.
The time duration is short.
That being said, let’s check out a hypothetical production possibility schedule and analyse it in the graphical format.
Production Possibility Schedule
Notably, the production possibility schedule is based on the Production possibility curve assumptions mentioned above.
Here, both P and P1 are the production possibilities of an economy which can produce either 250 kg of butter (X) or 250 kg of sugar (Y) as shown against possibilities P and P1. Nonetheless, as per assumptions, the economy must produce both commodities, thus giving rise to production possibilities like B, C and D accordingly.
As per the schedule, in case of B - an economy can produce 100 kg of butter and 230 kg of sugar. On the other hand, in the case of C – it produces 150 kg of butter and 200 kg of sugar. Lastly, in the case of D – it can produce 200 kg of butter and 150 kg of sugar.
The general observation prevailing here is, as an economy produces more of butter, it automatically produces less of sugar. To elaborate, an economy reduces a portion of resources from the production of butter to produce more sugar.
Now let’s proceed to look at the graphical representation of the same example in the format of the production possibility curve.
In this PPC, butter (X) is measured horizontally, i.e. along the X-axis and sugar (Y) is measured horizontally along the Y-axis. The concave curve PP1 highlights various combinations of these two commodities P, B, C, D and P1.
Each transformation curve or production possibility curve serves as the locus of production combinations which can be achieved through allocated quantities of resources. One can notice the rate of transformation on this curve as they move from point B to point C and then ultimately to point D. Also, there is a noticeable increase in the said rate of transformation. Since the curve shows that combination B, C and D can be achieved with the available resources, they are labelled as technologically efficient combinations.
Further, the production possibility curve ‘R’ lying on this curve indicates that the economy is not using its available resources efficiently. Similarly, possibility ‘K’ lying outside this PPC curve indicates that the economy does not have enough resources to produce the said combination. Both such combinations can be labelled as technologically unobtainable.
DIY: Try to solve a project of your choice on the Production Possibility Curve from your textbook and find out if you can solve it without any help!
Now that we have gained substantial ideas about the production possibility curve, we should move onto finding its application in real life.
Application of Production Possibility Curve
It helps to detect the unemployed resources in an economy.
Explains the overall increase in production of both X and Y through technological progress.
It comes in handy to understand the growth of an economy.
Helps to understand the allocation of proper resources to increase production.
Helps to understand economic efficiency in terms of production better.
Offers an overview as to how to economise resources for production successfully.
Do you want to learn more about applications of PPC in practical set-up and access detailed explanation of their graphical representation? Refer to Vedantu’s compact production possibility notes and strengthen your understanding of the fundamentals and other vital concepts effectively. Don't wait around, download Vedantu app on your device now to jumpstart a fun and innovative way of learning.
1. What is the Production Possibility Curve?
Ans: Production possibility curve is a graphical representation which helps to analyse and illustrate the pertinent problem of choice. It further helps to identify an ideal combination of two commodities to produce them both with the available resources.
2. Why Does the PPC Slope Downward?
Ans: PPC slopes downward when producers divert some resources from one commodity in the Y-axis to produce more of the other in the X-axis.
3. What Does Each Point on a Production Possibilities Curve Show?
Ans: Each point on a PPC shows production combinations that a firm can achieve by allocating available resources optimally.