Production Possibilities Curve (PPC)

As the resources available around us are scarce, we cannot satisfy all of our needs and wants. And even if all the resources in the economy are utilized in the best possible manner, their capabilities are restricted due to scarce resources. Therefore, we are forced to make economic decisions and choose among alternate goods and services to satisfy our wants in the best possible manner. Hence, society has to decide what to produce out of the infinite possibilities. The graphical presentation of this range of possibilities is known as Production Possibility Curve (PPC) or Production Possibility Frontier (PPF).

What is Production Possibility Curve?

Production Possibility Curve (PPC) is the graphical representation of all the possible combinations of two goods that can be produced with the given resources and technology. Simply put, a PPC shows different combinations of two goods, that an economy can produce by fully utilizing its resources, assuming a fixed technology level.

Assumptions of PPC

Production Possibility Curve is based on the following assumptions:

1. Fixed Resources: The quantity and quality of resources available in the economy is assumed to be fixed. This includes factors of production such as labor, capital, land, and technology. However, one can transfer the resources from one use to another.
2. Fixed Technology: The PPC assumes that the level of technology available for production remains constant. This means that the methods, processes, and efficiency of production do not change.
3. Full Employment of Resources: The PPC assumes that all available resources in the economy are fully employed and utilized efficiently.
4. Two Goods: The PPC assumes that with the given resources, only two goods can be produced.
5. Unequal Efficiency in Production: Under PPC, it is assumed that the resources are not equally efficient in the production of all goods. Therefore, when the resources are transferred from one use to another (production of one good to another), the productivity declines.

Example of Production Possibility Curve

Suppose two goods, say Apple and Orange, are to be produced by using the available resources in the economy. Following is the hypothetical schedule and diagram of the possible combinations of these goods.

Possibilities	Apple (in units)	Orange (in units)	Marginal Opportunity Cost (MOC)	MRT = [Tex]\frac{\Delta{Apple}}{\Delta{Orange}}[/Tex]
A	15	0	–	–
B	14	1	1	1A : 1O
C	12	2	2	2A : 1O
D	9	3	3	3A : 1O
E	5	4	4	4A : 1O
F	0	5	5	5A : 1O

The graphical presentation of the above schedule is known as Production Possibility Curve. It is shown as below:

Observations:

• If the economy use all of its resources to produce Apples, then maximum of 15 units of Apples and 0 Oranges can be produced (shown by Point A).
• If the economy uses all of its resources to produce Oranges, then maximum of 5 units of Oranges and 0 Apples can be produced (shown by Point F).
• The points in between (from Point B to Point D) are different possibilities with combinations of Apples and Oranges.
• By joining points A, B, C, D, E, and F, we get a curve, known as the Production Possibility Frontier or Production Possibility Curve.
• AF curve shows the maximum limit of production Apples and Oranges.

Marginal Opportunity Cost (MOC)

It is the number of units of a commodity sacrificed to gain one more unit of another commodity. Under PPC, Marginal Opportunity Cost is always increasing. It means that more units of a commodity have to be sacrificed in order to gain one more unit of another commodity.

Marginal Rate of Transformation

It is the ratio of number of units of a commodity sacrificed to gain one more unit of another commodity.

[Tex]MRT=\frac{\Delta{~Units~Sacrificed}}{\Delta{~Units~Gained}}[/Tex]

Marginal Rate of Transformation measures the slope of PPC.

In the above example, 14 units of Apple and 1 unit of Orange (14A + 1O) can be produced by utilizing the resources available with full efficiency. However, if the economy decides to produce 2 units of Orange (2O), then it will have reduce the production of Apple by 2 units. Hence, in this case, 2A is the opportunity cost of producing 1O.

MRT = 2A:1O

Properties of PPC

The two properties of Production Possibility Curve (PPC) are as follows:

1. PPC slopes Downward: A PPC curve shows all the possible combinations of two goods that can be produced with the given resources and technology. Here, one can produce more of one commodity only by taking away resources from the production of another commodity. Due to this there is inverse relationship between the change in quantity of one commodity and change quantity of another commodity, resulting in downward slope of PPF curve from left to right.

2. PPC is Concave Shaped: Increasing Marginal Rate of Transformation (MRT) is the reason behind concave shape of a PPC curve. Increasing MRT means that more units of one commodity are sacrificed to gain one more unit of another commodity. The reason behind increasing MRT is the assumption that any resource is never equally efficient to produce all goods. Thus, as the resources are transferred from one good to another, less and less efficient resources are employed; increasing cost and MRT.

PPC and Opportunity Cost

Opportunity Cost of a product is the alternate option that must be given up in order to produce the given product. The concept of opportunity cost can be seen in PPC. In the above example, the opportunity cost of producing more Oranges is less Apples. As we move from points D to E, the production of Orange increases from 3 units to 4 units, but the production of Apples decreases from 9 units to 5 units. It means that the opportunity cost of the 4^th unit of Orage is sacrifice of 4 units of Apples.

Change in PPC (Shift and Rotation)

One of the assumptions under PPC is fixed resources. However, if we consider the today’s changing environment, due to the increase or decrease in resources, the production capacity of an economy keeps on changing constantly. These changes results in a change in PPC. As the change in PPF curve shows either increase or decrease in the productive capacity of the economy, the change in PPC can be of two types; viz., Shift in PPC (change in productive capacity with respect to both goods) and Rotation in PPC (change in productive capacity with respect to one good only).

1. Shift in PPC:

When there is a change in resources or technology with respect to both goods, a PPC curve can shift either rightwards or leftwards.

i) Rightward Shift in PPC:

When there is advancement in technology or growth in resources, in respect to both goods, the PPC will shift in right direction. For example, if there is an advancement in agriculture technology for the production of Apples and Oranges, more of both goods can be produced. In such a case, the existing curve (PP) will shift to the right (P₁P₁).

ii) Leftward Shift in PPC:

When there is a degradation in technology or a decrease in resources, in respect to both goods, the PPC will shift in left direction. For example, if there is destruction of resources due to floods, the production of Apples and Oranges will reduce. In such case, the existing curve (PP) will shift to the left (P₁P₁).

2. Rotation of PPC:

When there is a change in resources or technology with respect to only one good, the PPC curve will rotate either for the commodity on X-axis or the commodity on Y-axis.

i) Rotation for commodity on X-axis:

When there is advancement in technology or growth in resources for the production of the commodity on X-axis (say, Orange as in above example), then the PPC will rotate from AB to AC; i.e., rightwards rotation. However, if there is degradation in technology or reduction in resources, the PPC will rotate from AB to AD; i.e., leftwards rotation.

ii) Rotation for commodity on Y-axis:

When there is advancement in technology or growth in resources for the production of the commodity on Y-axis (say, Apple as in above example), then the PPC will rotate from AB to CB; i.e., rightwards rotation. However, if there is degradation in technology or reduction in resources, the PPC will rotate from AB to DB; i.e., leftwards rotation.

Production Possibility Curve – FAQs

Will an economy always operate on PPF?

No. A PPC curve does not always show the point at which the economy will operate. It only shows the possible combinations which can be produced. The operation point depends on the efficiency to which the resources are used.

When will an economy operate on PPC?

An economy will operate on PPC in the following cases:

• An economy will operate on PPC (Attainable Combinations) only when the resources are fully and efficiently utilized.
• It will operate at any point inside the PPC (Attainable Combinations) in case resources are not fully and efficiently utilized.

However, an economy cannot operate at any point outside the PPC (Unattainable Combinations) as it is not possible to attain them with the available resources.

What do you mean by Attainable Combinations?

Attainable Combinations are the ones at which an economy can operate. There are two attainable options:

1. Optimum Utilization of Resources: If the resources are used in the best possible manner, then the economy will operate at any point lying on the PPC Curve.
2. Inefficient Utilization of Resources: If the resources are not fully utilized or are wasted, then the economy will operate at any point inside the PPC Curve.

What do you mean by Unattainable Combinations?

It is impossible for an economy to produce more than the given possible combinations of two goods, with the available resources. Therefore, unattainable combonations are the points outside the PPC Curve on which an economy can never operate.

Can PPC be a straight line?

Yes, PPC can be a straight line if MRT is assumed to be constant. Constant MRT means that to gain additional unit of a commodity, same unit of another commodity is sacrificed. It can only be possible if it is assumed that all resources are equally efficient for the production of all goods.

Can PPC be convex to origin?

Yes. PPC can be convex to origin if MRT is assumed to be decreasing. Decreasing MRT means that to gain additional unit of a commodity, less unit of another commodity is sacrificed.