PRODUCTIVE POSSIBILITY CURVE —MEANING, SLOPE, TYPES AND SIGNIFICANCE

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The total amount of goods and services an economy is capable of producing is more or less determined by the resources and technology available to the economy.  

Factors like the quality of resources, quantity of resources, and technology help define a society's production possibilities.

The production possibilities can be represented on a graph or what economists called the production possibility curve.

A production possibility curve (PPC) shows the trade-off between two goods that can be produced.

The production possibility curve is simply the graphical representation of the plausible combinations of two goods that can be produced given the available resources and technology.

A production possibility curve is also called the production possibility frontier,  transformation curve.

The concept of PPC is used in microeconomics to describe the productive possibilities available to an individual firm. 

It is also used in macroeconomics to describe all production possibilities available to an economy or nation.

A typical production possibility curve is usually downward sloping indicating the opportunity cost of producing the two goods.

The accompanying production possibility curve shows the trade-off between bags of beans and rice.


Production possibility curve
As is with demand, this information can also be represented on a table or Production possibility schedule.

Production possibility set
Figure (a)

At alternative A, only rice can be produced. This means the society would be deducting all its resources to the production of only bags of rice.

At the other extreme, if the society or individual firm chooses to produce at alternative f, it will be producing 2000 bags of beans and 0 bags of rice.

This means society would be devoting all its resources to the production of only beans.

In between the two extremes, the society could devote its resources to the combinations of rice and beans from point B to point E. 

Thus, by choosing any of the alternatives, it must sacrifice some bags of rice for beans–indicating opportunity cost, we would discuss opportunity cost subsequently.

By joining points A to F together, we have the production possibility curve.

All points on the production possibility curve are points of productive efficiency.

Productive efficiency occurs when the maximum output is produced from given resources and technology so that it is impossible to produce more of one good without decreasing the number of other goods.

Going back to figure (a), as we move from one alternative to another, bags of rice is decreasing, and bags of beans are increasing and vice versa.

Any point below the production possibility curve would represent the point of productive inefficiency and wasteful.

To illustrate, point D in the production possibility curve below represent productive inefficiency and wastefulness.

This is because the society would be under-utilizing its resources at point D. Consequently, the society would not be satisfying as many wants as it would have if its resources were utilized efficiently.

Production possibility curve
Figure (b)
The production possibility curve can also be used to show the combinations of two goods that are not attainable by an individual firm or society.

For example, in figure (b), point C, which is above the production possibility curve, represents the combination of cars and computers that is not attainable given the level of technology and resources.

In simple words, point C represents the combination of cars and computers that society can not produce, at least for now, because it does not have the resources and technology to do so.

To attain point C, the society or individual firm would require an increase in the quality and quantity of resources plus an improvement in technology.

Relationship Between Production Possibility Curve And Opportunity Cost

Opportunity cost is simply the cost of the alternative forgone. The production possibility curve, on the other hand, shows the plausible combinations of two goods that can be produced.

In figure (a), as we moved along the curve from point A to point F, different combinations are chosen.

You would observe that fewer rice is produced as more beans are produced. 

This emphasizes that the cost of producing more bags of beans is the bags of rice that has been sacrificed.

In clear terms, the opportunity cost of producing more bags of beans is the bags of rice that is sacrificed.

Another name for the Production possibility curve is the "transformation curve". This implies that as we moved along the curve, the composition of our output is being transformed.

For instance, when we moved from A to B, our composition of output transformed from 0 bags of beans and 1000 bags of rice to 400 bags of beans and 800 bags of rice.

In similar lines, the slope of the production possibility curve is called the marginal rate of transformation because it reflects the rate at which one product is being transformed into another.

Types Of Production Possibility Curve

There are three types of production possibility curves, namely; Straight line, bowed outward and inverted production possibility curves.

1. Straight-line production possibility curve: A straight-line production possibility curve is one with a constant opportunity cost. The shown owed in figure (a) is a Straight-line PPC.

2. Bowed-outward (concave downward) production possibility curve: This represent an increasing opportunity cost. 
Most opportunity costs are bowed-outward because of the law of increasing opportunity costs.


3. Inverted production possibility curve: This is a PPC with a decreasing opportunity cost.

Economic Growth And Production Possibility Curve

So far, our production possibility curve has been drawn on the assumption that the number of resources and state of technologies used.

What happens if the number of resources or the state of technology increases?

You guess right!  economic growth.

Economic growth occurs when a society's capacity to produce two goods increases. 

More appropriately, economic growth exists when there is an expansion in the production possibilities available to an economy so that the production of neither good has to be sacrificed.

As you would see in figure (c), economic growth is represented by an outward shift of the PPC.

Economic growth is caused by two major factors which are an increase in the number of resources and an advancement in technology.

An increase in the number of resources(say the discovery of new resources) would almost always lead to economic growth as greater output can now be produced.

Likewise, technology affects economic growth. Technology, as I said before, is the body of skills, abilities, and knowledge relating to the use of resources in production.

An advance in technology would shift the production possibility curve outward as more goods can now be produced with a fixed amount of resources. 

Related post

We have come to the end of this blog post, for a recap, here are ten things to note about the production possibility curve.

1. Production possibility curve shows the combination of two goods that can be produced given the available resource and technology
2. Production possibility curve is also called the transformation curve.

3. The slope of the production possibility curve is called the marginal rate of transformation.

4. Most production possibility curve is bowed-outward.

5. A straight-line production possibility curve represents a constant opportunity cost.

6. All points on the production possibility curve are points of productive efficiency.

7. Points below the production possibility curve are points of productive inefficiency.

8. Production possibility curves are generally downward-sloping.

9. Economic growth is represented as an outward shift in the production possibility curve.

10. An inverted production possibility curve represents a decreasing opportunity cost.

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