Explain the concept of production possibility curve. |
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| Ans : Production possibility curve is the locus of various combination of two goods and services that an economy can produce with the full utilization of it’s given resources and state of technology.
In other words, production possibility curve is the graphical representation that shows all possible combination of goods and services that an economy can produce with full employment of available resources within specific time period.
Assumption
i) Available resources are fully and efficiently utilize in the economy.
ii) No change in technology.
iii) Perfect mobility of factors of production from one use to another.
iv) Economy can produce only two goods.
Now for simplicity we assume that only two goods i.e. T.V sets and computer can explained with the following table:
# Production possibility schedule
Production possibility T.V Set Computer
A
0
1500
B
1000
1400
C
2000
1200
D
3000
900
E
4000
500
F
5000
0
From the above table, the economy can produce a maximum of 1500 computer with combination ‘A’ or 5000 of T.V sets with combination ‘F’ by using available resources. Beside these are other possibilities. For example, under ‘B’ combination it is 1000 T.V sets and1400 computer, under ‘C’ combination 2000 T.V sets and 1200 computer, under ‘D’ combination it is 3000 T.V sets and 900 computer and so on. Representative these various production possibilities on a graph we get production possibility curve which is presented below:
In the given figure ox-axis represent T.V set and oy-axis represents computer. Point ‘A’ represent production possibility of 1500 computer and no T.V set. Similarly point ‘F’ represents 5000 T.V sets with no computers. Point ‘B’, ‘C’, ‘D’ and ‘E’ represent different combination of T.V sets and computers. By combining all these points from ‘A’ to ‘F’ we get production possibility curve.
The economy cannot choose a point outside the PPC that is point H. To produce at this point the economy required more resources or improved technology. On the other hand, an economy can produce at point ‘G’ but at this point it’s resources will remain unutilized. Hence, it has to choose a point on the PPC.
As shown in the table and diagram, to increase the production of one commodity, the economy has to reduce the production of other commodities. In other words resources are transfer from one use to other. That is why production possibility curve is also known as transformation curve.
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