Posted by
Anjali Kaur
on
Jun 02, 2020
Production Possibility Curve
This topic is one of the initial concepts in the microeconomics subject. Every economics student from school to college studies the Production Possibility Curve. Let’s understand this concept in simple language.
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Meaning of The Production Possibility Curve (PPC)
This is a curve that shows the different production possibilities or the production combination of two goods that an economy can produce, given the resources and technique of production. So, we start with an economics subject considering that each economy only produces two goods. Why do we do that? Well, it is easy to explain economics subjects using two dimensions, we can represent two goods with the help of the X-axis and Y-axis.
While constructing the PPC, some assumptions are to be kept in mind:
- The resources are fixed. Like the size of land, or the number of laborers working will remain constant.
- The technology remains unchanged. So, whatever technique of production and economy is using will remain the same. This means, if an economy has started working with the capital-intensive technique it will remain the same during the entire production process and will not change to the labor-intensive technique in between.
- The resources are fully employed. Whatever resources we have will be used properly with nothing remaining idle or unused.
- The resources are not equally efficient in the production of all the goods. As, we have two goods assumptions, whatever resources we are using for the production of two goods, those resources will not be efficient in producing both goods equally.
To construct the PPC, we need a production possibility schedule and we need to understand the concept of the slope of the production possibility curve which is called ‘Marginal Opportunity Cost’.
Production Possibility Schedule
Production Possibility schedule is a table that shows different production possibilities of two goods, given the resources and technique of production. Have a look at the following table:
| Production Possibilities | Apple (Good X) | Mango (Good Y) |
|---|---|---|
| A | 0 | 15 |
| B | 1 | 14 |
| C | 2 | 12 |
| D | 3 | 9 |
| E | 4 | 5 |
Production Possibility Schedule
Before constructing the Production Possibility Curve, we will also understand its slope concept.
Marginal Opportunity Cost (MOC)
This is the slope of the production possibility curve. Marginal Opportunity Cost (MOC) refers to the rate at which the production (or quantity) of one commodity is sacrificed (Good Y) to produce one more unit of other commodities (Good X). To construct the production possibility curve we calculate marginal opportunity cost using the slope formula. MOC = Δy/Δx
It is read as a sacrifice in the production of good Y, to produce more units of good X (or change in Y over a change in X).
With the help of marginal opportunity cost, we can easily depict the shape of the production possibility curve. Let’s see what are the three main shapes of the production possibility curve.:
- If the marginal opportunity cost is increasing, then the production possibility curve is concave in shape. Look at the below production possibility schedule:
| Production Possibilities | Apple (Good X) | Mango (Good Y) | MOC= Δy/Δx |
|---|---|---|---|
| A | 0 | 15 | – |
| B | 1 | 14 | (14-15)/(1-0)= 1 |
| C | 2 | 12 | (12-14)/(2-1)=2 |
| D | 3 | 9 | (9-12)/(3-2)=3 |
| E | 4 | 5 | (9-5)/(4-3)=4 |
Note: PPC is always negatively sloped, so we ignore the minus sign of MOC.
Here, MOC is increasing, so the PPC will be concave shaped like this:
- If the marginal opportunity cost is decreasing, then the production possibility curve is convex in shape. Have a look at another production possibility schedule where the slope; MOC is in decreasing order:
| Production Possibilities | Apple (Good X) | Mango (Good Y) | MOC= Δy/Δx |
|---|---|---|---|
| A | 0 | 12 | – |
| B | 1 | 7 | (7-12)/(1-0)=5 |
| C | 2 | 3 | (3-7)/(2-1)=4 |
| D | 3 | 0 | (0-3)/(3-2)=3 |
Note: Again minus sign is ignored while calculating MOC because PPC is always negatively sloped
Here, MOC is decreasing so PPC will be convex in shape like this:
- If the marginal opportunity cost is constant, then the production possibility curve will be a negatively sloped straight line(like a demand curve). Look at the below production possibility schedule:
| Production Possibilities | Apple (Good X) | Mango (Good Y) | MOC= Δy/Δx |
|---|---|---|---|
| A | 0 | 16 | – |
| B | 1 | 12 | 4 |
| C | 2 | 8 | 4 |
| D | 3 | 4 | 4 |
You can try calculating MOC on your own
Since, here MOC is constant and is equal to 4. So, the PPC curve will look like this:
Note: Production possibility curve is also known as Production possibility frontier or transformation curve. Marginal opportunity cost is also known as the marginal rate of transformation.
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