PPC

PRODUCTION POSSIBILITY CURVE

(Concept and definition)
 PRODUCTION POSSIBLIITY CURVE

CONCEPT
ALTERNATE USES OF RESOURCES
Available resources can be put to alternate uses
A given resource can be used for one use at a time.

PROBLEM OF CHOICE
Economy has to make a choice between different ways of
allocating the available resources.
It can produce more of one commodity on the cost of
another commodity
OPPORTUNITY COST
Cost of next best alternative activity sacrificed in order to
carry out a given activity
 PRODUCTION POSSIBLIITY CURVE

Y
A. No consumer goods are
CAPITAL GOODS (MACHINERIES)

produced
A B
E. No capital goods are produced

B. More capital goods and less

C consumer goods are produced
C. Both consumer goods and
capital goods produced in equal
D proportion
D. More consumer goods and less
capital goods are produced

X
O E
CONSUMER GOODS (CARS)
 PRODUCTION POSSIBLIITY CURVE

A B
On joining all combinations of
two commodities, Production
C Possibility curve (AE) is
CAPITAL GOODS

derived.

X
O E
CONSUMER GOODS
 PRODUCTION POSSIBLIITY CURVE

DEFINITION
Production possibility curve is defined as the curve
which represents various combinations of two
commodities that an economy (or an individual) can
produce from fuller and efficient utilisation of available
scarce resources
 PRODUCTION POSSIBLIITY CURVE

ASSUMPTIONS
Only two commodities can be produced.
The quantity of available resources is fixed.
Technology and other factors which may affect
production do not change.
All resources are fully and efficiently utilised
All resources are not equally efficient between different
productive activities.
 PRODUCTION POSSIBLIITY SCHEDULE

Production possibility schedule is defined

as a tabular statement which represents
various combinations of two commodities
that can be produced from a given scarce
resource.
 PRODUCTION POSSIBLIITY SCHEDULE

MARGINAL RATE OF
COMBINATION COMM. X COMM. Y
TRANSFORMATION

A 0 30 -

B 1 28 2:1

C 2 24 4:1

D 3 18 6:1

E 4 10 8:1

F 5 0 10:1
PRODUCTION POSSIBLIITY CURVE

FEATURES
 FEATURES OF PPC
MAXIMUM PRODUCTION LEVEL
Y
Based on fuller and efficient
utilisation of resources, it
A B represents maximum
production level in the
economy.
C
CAPITAL GOODS

Also termed as PRODUCTION

POSSIBILITY FRONTIER of an
D economy.

X
O E
CONSUMER GOODS
 FEATURES OF PPC
MAXIMUM PRODUCTION LEVEL
Y
It represents that any production
combination which lies outside
A B the PPC (Combination F) cannot
F be achieved from the given
amount of resources and level of
C technology.
CAPITAL GOODS

However, if resources are under

G D utilised or inefficiently utilised
then the actual production
combination can lie inside the
PPC (Combination G)

X
O E
CONSUMER GOODS
PRODUCTION POSSIBLIITY CURVE

PROPERTIES
 PROPERTIES OF PPC
DOWNWARD SLOPING
Y
In order to increase the
production of consumer goods,
A B the production in capital goods
has to be decreased.
CAPITAL GOODS

Represents the concept of

opportunity cost.

X
O D
CONSUMER GOODS
 PROPERTIES OF PPC
CONCAVE TO ORIGIN
Y
Based on the concept of
increasing marginal rate of
A B transformation due to which it is
always made represented as
concave to its origin.
C
CAPITAL GOODS

X
O E
CONSUMER GOODS
 PRODUCTION POSSIBLIITY CURVE

OPPORTUNITY COST
AND
MARGINAL RATE OF TRANSFORMATION
 OPPORTUNITY COST

Opportunity cost of any activity is defined as the

cost of next best alternative activity that has been
sacrificed in order to carry out a given activity.

In terms of production, it is defined as the sacrifice

made in terms of one commodity in order to
produce a given quantity of another commodity.
 OPPORTUNITY COST

Y
At A all resources are used in
production of capital goods.
A
In order to produce OD units of
consumer goods, resources are
withdrawn from capital goods due
CAPITAL GOODS

to which the production of capital

goods falls from OA to OE.
C Opportunity cost of producing OD
E
units of consumer goods will be
AE units of capital goods.

X
O D B
CONSUMER GOODS
 MARGINAL RATE OF TRANSFORMATION

Also termed as Marginal Opportunity cost

It is defined as the rate at which one

commodity is sacrificed in order to increase
the production of another commodity by one
unit.

Expressed as k Y : 1X
Which represents that k units of commodity Y are
sacrificed in order to increase the production of
commodity X by one unit.
 MARGINAL RATE OF TRANSFORMATION

In order to increase the production

Y of consumer goods from OF to OH,
the production in capital goods is
sacrificed by EG units.
A
Marginal rate of transformation for
producing FH unit (1 unit) of
C consumer goods will be
CAPITAL GOODS

E represented by
1 [Consumer] : EG [Capital]

C
G

X
O F H B
CONSUMER GOODS
 PRODUCTION POSSIBLIITY CURVE

SHAPE OF PRODUCTION POSSIBILITY CURVE

 SHAPE OF PPC
• PPC is based on an assumption, that all
resources are not equally efficient in all
productive activities.
• Resources are withdrawn from one commodity
(commodity Y) in increasing order of efficiency
in Y
• i.e. Least efficient resources are withdrawn first
• Marginal rate of transformation increases due to
increase in efficiency in the production process.

Hence PPC is made concave to origin.

 SHAPE OF PPC

Y PPC IS CONCAVE TO THE

ORIGIN BECAUSE OF
A B INCREASING MRT
A1 C
A2
D
A3
CAPITAL GOODS

MRT IS INCREASING AS ALL

E RESOURCES ARE NOT
A4
EQUALLY EFFICIENT IN
PRODUCTION OF BOTH THE
COMMODITIES.

F
X
O 1 2 3 4 5
CONSUMER GOODS
 STRAIGHT LINE PPC

Y With increase in production of

units of commodity X, the
A sacrifice in commodity Y
remains constant
A1 B
From figure
CAPITAL GOODS

C AA1 = A1A2 = A2A3 = A3A4 = A40

A2
And hence PPC is represented
A3 D as a straight line.

A4 E

F
X
O 1 2 3 4 5
CONSUMER GOODS
PRODUCTION POSSIBLIITY CURVE

SHIFT IN PPC
 SHIFT IN PPC

PPC is based on fuller and efficient utilisation

of resources due to which it represents
maximum productive capacity.
PPC will shift only if there is a change in
productive capacity in the economy
 SHIFT IN PPC

RIGHTWARD SHIFT IN PPC

• A production possibility curve will shift towards
the right only if there is an increase in productive
capacity in the economy.
• Productive capacity may increase due to :
1. Increase in quantity of available resources.
2. Increase in productive efficiency.
 SHIFT IN PPC

RIGHTWARD SHIFT IN PPC

Y

With increase in productive

A1
capacity the production
A
combinations for both the
commodities will increase in equal
CAPITAL GOODS

proportion from AB to A1B1 .

The PPC (AB) will shift towards the
right (A1B1).

X
O B B1
CONSUMER GOODS
 SHIFT IN PPC

LEFTWARD SHIFT IN PPC

Y
A production possibility
curve will shift towards the
A
left only if there is a decrease
A1 in productive capacity in the
economy due to destruction
CAPITAL GOODS

of resources.

X
O B1 B
CONSUMER GOODS