Production Possibility Curve Explained-Assumptions, Features, Importance and Types

The production possibility curve falls in the category of macro-economics and is an important factor in business analysis. As a part of economics it also plays a major role in a country’s economic affairs.

 

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The production possibility curve can be used to speculate and demonstrate the economy of a country and when it reaches its greatest level of efficiency what should be or can be produced with the available resources. A country or economy is able to produce more of one good only if it produces less of another. 

 

Applying the production possibility curve in an economy is important as it helps the economy to decide the combination of goods and services to be produced in order to achieve maximum resource efficiency.

 

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In this blog we will analyse and understand what exactly a production possibility curve is, and the various aspects such as features, limitations, assumptions linked to it. 

 

 

Production Possibility Curve 

 

Production possibility curve is also known as Production Possibility Frontier or Production Possibility Boundary. It shows alternative possibilities of two goods that can be produced with the usage of the given resources and techniques of production. 

 

Production possibility frontier refers to the collection of all possible combinations of goods and services that can be produced from the given amount of resources and a given stock of technological knowledge. 

 

It shows the combination of two goods when resources are fully and efficiently utilised, the technique of production remaining constant. 

 

 

Assumptions of Production Possibility Curve 

 

The production possibility curve is based on assumptions as the market keeps changing constantly. 

 

Assumption 1:- According to the production possibility curve, the economy is assumed to have only two goods which represent the entire market. 

 

Assumption 2:- The supply of resources to the economy is assumed to be fixed or stay constant. 

 

Assumption 3:- The technology or the techniques of production are assumed to be constant. 

 

Assumption 4:- The production possibility curve assumes that all the resources are used efficiently and fully. But in reality, these are not used or utilised entirely. 

 

Features of Production Possibility Curve 

 

The features of production possibility curve are as follows:

 

1. The PPC is a downward sloping curve i.e. from left to right. This is because it indicates that, to increase the production of one commodity, production of another has to be reduced.

 

2. The PPC stands concave to its point of origin on the graph which is a result of the increasing marginal rate of transformation. 

 

3. The shape of the PPC will also depend on whether there are increasing, decreasing, or constant costs of production. 

 

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4. The points lying on the PPC show combinations of output that can be produced by efficient utilization of resources. One is unable to determine which points are allocatively efficient if one does not know the preferences.

 

 

Importance of Production Possibility Curve 

 

 

The Production possibility curve has popularly come to be a significant part of the modern economy. It strongly helps in determining whether the given resources are being utilised fully keeping the technology being used constant or what goods can be produced with the same. It helps one to put forth the basic economic production and service problem.

 

The Production possibility curve can also be used to depict and illustrate the various concepts of scarcity, opportunity cost, efficiency, inefficiency, economic growth or shifts, etc.

 

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It also enables the economy to decide what products are to be produced and in what quantities. It plays an important role as it shows all the alternative ways to use the economies resources efficiently.

 

The central problems faced by an economy are:- 

 

i) What to produce?

 

This refers to the decision of the economy on what type of goods are to be produced. 

 

For example: consumer goods such as rice, sugar, oil, etc.

 

Or capital goods such as machines, tools, equipment, etc. 

 

The economy also has to decide the quantity of production.

 

ii) How to produce ?

 

Once the goods to be produced are chosen, a choice of combination of techniques of production has to be made. That is, Labour intensive techniques or Capital intensive techniques. 

 

Keeping all these factors in mind, Production possibility curve helps producers to plan accordingly and determine the best product and possibilities of techniques to be used for production. 

 

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Types of Production Possibility Curves

 

In total, there are 3 types of production possibility curves. Namely, straight line sloping down, concave and convex.

 

When the line is sloping downwards, it shows  that there will be less production of one good and more of the other which will always remain constant. This is because the curve has a negative gradient. But this type of a curve cannot always be considered and is not realistic as it cannot represent the actual market or the economy.

 

The second one; concave curve. This curve shows an increasing ratio,it suggests a decrease in more of an item’s production to produce more of the other item and the decreasing number keeps an increase in the other as a sacrifice for another item/good. 

 

This curve is more realistic and can be used to represent the market or the economy.

 

The third curve; the convex curve which has a decreasing ratio which suggests that we need to decrease less of an item to produce more of an item and this decreasing number will keep the decrease as a moving element along the curve. This type of curve does not really exist in the economy. 

 

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Examples of Production Possibility Curve

 

Let us consider two goods, that is, Rice and Wheat. 

 

If the given resources are used for the production of wheat alone, then let us say that 10 Lakh tonnes of wheat can be produced. If all the resources are used for the production of rice alone, then let us say that 4 lakh tonnes of rice can be produced. 

 

If the producer decides to produce both the goods then various combinations of goods can be produced. If more of one good is produced then less of the other will be produced. 

 

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The graphic representation of the same will form a curve showing the different possibilities of production with the given resources and technology. Any point outside the boundary line of the production possibility curve will represent , unattainable combination of output of the two goods. 

 

Conclusion

 

To conclude, it can be said that in order to attain efficiency the produced goods and services must be regulated and managed properly and systematically. If false allocation of resources takes place, it can lead to shrinkage and loss in the economy. 

 

Lack of resources and inefficiency of proper implementation of technology in production can lead to a decline of the economy. Therefore, the production possibility curve should be applied while producing goods and services to gauge the output level.