What is the meaning of production possibility curve?

 Production Possibility Curve...

It is an economic tool to solve the problem of scarcity and choice. Production possibility curve is the graphical representation of alternative production possibilities facing on economy. As the total productive resources of the economy are limited, it has to decide about the goods to be produced and their quantities on the basis of priorities and preferences of the society. Increase in production of one commodity requires a reduction of production of other commodity.

   Let us suppose that the economy produce only two commodities i.e consumer goods and capital goods. In these two commodities also, there are various production possibilities that the economy can produce with its limited resources and technology. A curve which shows these production possibilities is called production possibility curve. Out of various production possibilities, the economy can choose anyone production possibility. A curve which shows this choice is called production possibility curve.

Assumptions: The concept of PPC is based on the following assumptions:

1. Factors of production are fixed and constant.

2. Production techniques most remains constant.

3. Based on short run analysis.

4. Full employment in an economy.

5. Substitution of factors of production.

      On the basis of above assumptions, the concept of PPC can be explained with the help of schedule and diagram.

Schedule of Production Possibility...

In the above schedule, if the economy uses all its resources and technology in the production of capital goods, it can produce 15 thousands units but the production of consumer goods will be 0 (PP-A). If the economy wanted to produce one thousand units of consumer goods , it has to reduce the production of capital goods by one thousand units because some resources and technology should be transferred from capital goods to consumer goods (PP-B). Again if the economy wanted to produce one more thousand units of consumer goods, it has to reduce the production of capital goods by 2 thousands units (PP-C). In this way, there are six such production possibilities (A, B, C, D, E and F) which shows that if the economy wanted to increase the production of one commodity then it has to reduce the production of other commodities and the rate reduction goes on increasing, it is known as marginal rate of technical substitution of consumer goods for capital goods. If we present the schedule in the form of diagram, we will get the production possibility curve as shown in the following figure:

In the above diagram, AF is the production possibility curve which is made by joining various production possibilities (A, B, C, D, E and F) of two goods i.e consumer goods and capital goods. It’s downward sloping concave to the origin due to increasing marginal rate of technical substitution.