Production Possibility Curve
Production Possibility Curve (PP Curve)
Production possibility curve is a curve which depicts all possible combinations of two goods which an economy can produce with available technology and with full and efficient use of its given resources.
Resources to satisfy human wants are not only limited but also have alternative uses. Human wants are unlimited. It is essential to make a choice between alternative uses of available resources. Due to the characteristic feature of scarce resources having alternative uses, there is maximum limit to the production of goods and services which an economy can produce with full and efficient use of available resources. It demand the diversion of some resources from producing one product to another product to increase the production of one particular goods or service. To increase the output of one product, we have to sacrifice or reduce the production of another product. Available resources can be used to produce various alternative goods which are known as production possibilities. The graph or curve showing the production possibility is called Prodcution Possibility Curve.
It is very difficult to make choice among hundreds and thousands of goods which can produced form the same resources. Although it can be used to analyze any number of commodities, economists have simplified the analysis by presuming only two goods.
PP Curve also know as Production Possibility Frontier represents different pairs or combinations of two goods which can be produced with an economies given technology and resources.
Production Possibility Curve is drawn on the following four assumptions:
Given resources are fixed.
Given technology remain constant and does not change.
Given resources are used fully and efficiently.
Resources are not equally efficient in production of all goods.
Production Possibility Curve has two characteristics:
It is downward sloping from left to right.
Production Possibility Curve is concave (curved inwards) to the origin.
Production Possibility Schedule and Curve
Production possibility curve indicates various alternatives in the form of combination of two goods which can be produced with full and efficient employment of given resources and available technology. Let us assume that with the given resources and technology an economy can produce only two goods, namely Wheat and Rice. The example of two goods is given to facilitate the problem of choosing otherwise same analysis applies to any choice of goods. Different possibilities of production of combination of Rice and Wheat in a hypothetical economy are illustrated in the following Production Possibility schedule and curve.
Different points on Production Possibility curve depicting different combinations of two goods are in fact choices that are open to society. If the economy decides to use all its resources in the production of Rice, then the wheat cannot be produced. If the economy decides to use all its resources in the production of wheat then the production of rice will not be possible. These are two extreme possibilities. In between them, there are many other possibilities. Economy can devote a pare of its resources to the production of Rice and a part to the production to wheat. Points B, C, D and E based on the data given in the schedule gives various combination of two goods. Curve AF indicates full employment of resources. Any point below or inside production possibility curve shows the under utilization of resources. Any point above the production possibility curve shows the growth of resources. All points like A, B, C, D E and F on Production possibility curve indicates efficient utilization of resources.
Indication of points on, below and above Production Possibility Curve(PPC)
Any point on PPC indicates full employment and efficient use of resources. Point below PPC shows inefficient and under utilization of resources. Point above PPC indicates growth of technology and resources.
When economy is producing on PP curve every point on it like A, B, C, D, E and F reflects situation of full and efficient employment of resources. This means resources like labour, land , capital etc are not idle. A production possibility curve shows the possibility of an economy in which full utilization of resources like Land, Labour, capital and technology can be employed.
Under utilization or Inefficient utilization of resources shows a point below the PP curve. Wrong allocation of land or capital or labour result in under utilization of resources. A point below the the Production Possibility curve denotes that the economy is not fully utilizing its productive capcity.
When economy is operating at any point above the Production Possibility curve indicates situation of growth of resources or improvement of technology. This will enable the economy to grow. Outward or rightward shift of Production Possibility Curve reflects growth of resources or advancement of technology.
Does the production take place only on PP Curve?
It is not necessary that the production takes place only on PP Curve. When resources are underemployed or inefficiently used, then production does not take place on PP Curve. Improvement of technology and growth of resources can also be a reason for deviation from the PP Curve.
Movement along a PP Curve from one point to another indicates the change in combination of two goods produced. More production of one item is possible by the sacrificing of the production of another item. This is the reason of the movement of a point in the Production Possibility Curve.
Why is PPC Downward Sloping?
Production Possibility Curve slopes down from left to right because in a full employment of resources, production of one item can be increased only after sacrificing some quantity of the other good. In the Production Possibility Schedule given above we find in point B the production of 1 million tonnes of wheat is possible by sacrificing 1 million tonnes of Rice. In combination C the same amount of wheat is produced by sacrificing 2 million tonnes of rice. As the production of one item (here wheat) increases when the production of another item (here rice) decreases. This is because the resources are limited and the production of both the items cannot be increased at the same time. That is why the Production possibility curve slopes down from left to right as shown above.
Why is Shape of Production Possibility Curve Concave?
The shade of a production Possibility Curve is concave (curved inwards) due to the increasing marginal opportunity cost. Increasing Marginal opportunity cost means producing an additional item requires the sacrifice of production of another item (i.e opportunity cost) goes on increasing. Resources specialized for the production of one item will not suite the production of another item. We have seen in the production possibility schedule above that the production of wheat is possible through the sacrifice of production of rice. Increase in the production of 1 million tonnes of wheat, sacrifice of production of rise is increasing successively from 1 million tonnes to 2 million tonnes, the from 2 to 4 million tonnes and so on indicating increasing Marginal Opportunity cost which is technically called Marginal Rate of Transformation (MRT). AS a result the shape of PPC become concave to the origin.
PPC has two basic properties:
PP Curve is downward sloping and
PP curve is concave to origin.
Note: PP curve will be a straight line if sacrifice of units of the other item is constant. i.e. Marginal opportunity cost/MRT is constant. PP Curve will become convex if sacrifice of units of other item goes on decreasing.
Solution of Central Problems and PP Curve
What to produce? This problem can be solved by choosing the right combination of production of two goods. See the production possibility schedule. There are different combinations of two goods like B, C, D, and E. These combination of production of goods are available to the society to choose from. Society has to select one option from the choice. According to its needs society can decide whether they need to produce more rice or more wheat. If the society decided to produce more wheat and less rice, it is likely to choose the combination of E. Likewise, the society is likely to choose the combination of B if the society is interested in producing more rice than wheat. Production possibility curve offers different options to society in the form of various combinations of goods to choose from according to its needs and thus helps solve the problem of 'what to produce'.
How to produce: The society can produce goods by using techniques which are labor intensive or capital intensive. If the technique used in the production is obsolete, the economy will operate at some point not on the PP Curve but inside it. It means the available resources are not utilizing in its full capacity. This will encourage the economy to change the technique so as to produce goods at some point on PP curve itself by making efficient use of its resources. In this way, PP Curve helps to solve the problem of 'How to produce'.
For whom to produce: If the combination of goods produced shows increase in output of necessary goods than luxury goods, it indicates that the taste of common people is being preferred to the needs of rich people. At the same time if the combination of goods produced shows increase in output of luxury goods than necessary goods, it indicates the taste of rich is being preferred to the needs of poor people. Society or economy can make necessary changes to suite the requirement of the society. In this way, we can solve the problem of 'for whom to produce'.