LIJIT SEARCH

Production Possibility Curve (PPC)

Production Possibility Curve is a graphical representation of alternative production possibilities facing an economy. A PPC is a graphical illustration of all combination of goods and services that can be produced in a given economy at a given time, if all the available resources in the economy are fully and efficiently employed.

As the total productive resources of the economy are limited the economy has to choose between different goods. The productive resource can be employed for the production of various alternative goods. It has therefore, to be decided which goods are to be produce more and which ones less.

Assumptions:
  1. Economy is produces two goods.
  2. Full employment of resources is assumed.
  3. Time period is given and constant.
  4. Factors of productions are given and constant.
  5. Production techniques is given and constant.

PPC Schedule

Production possibilities schedule shows the different combination of different goods with the given technology and factors of production. Let us assume that the economy is producing only two commodities: consumer goods and capital goods.

From the above table, if all the available resources are allocated to produce consumer goods, an economy can produce is 15 units at combination A with the limited resources, increase the capital goods production consumer goods will be sacrificed. Due to the increased opportunity cost of consumer goods an economy increase capital goods production rather than consumer goods. Lastly, if all the available resources are allocated to produce capital goods, an economy can produce 5 units at combination F.

If we join all these point of production possibilities a graphical representation of production possibility scale comes out in a curve then it is known as production possibility frontier.

PPC is a curve showing all possible combination of two goods that a country can produce within a specified time period with all its resources fully or efficiently employed. It is always concave to the origin.

The PPC also called transformation curve because in moving from one point to another on it, one good is 'transformed' into another not physically but by transferring resources from one use to the another.

Points Inside and Outside PPC

With the given resources being fully employed and utilized can lie anywhere on the PPC but not inside or outside of it.

For example, the combined output of two goods purchased can neither at G not at H. This is so because at point G the economy could not be utilizing its resources fully and the output of two goods represented by H given the productive resources would lie beyond the capacity of the economy to produce.

Outside Shift in PPC

If the productive resources expand or increase, the PPC will shift outward to the right showing that more of both goods can be produce than before. Technological progress by improving productive efficiency allows the society to produce more of the both goods with a given and fix amount of resources.

On PPC n'f', the economy can produce more goods than on curve AF. The PPC shift outward with the growth of the economy because of:

  1. The increase in the amount of capital.
  2. The increase in the amount of natural and human resources.
  3. Progress in technology.

0 comments:

Post a Comment