Skip to main content

What is a Production Possibility Curve (PPC) ? With Diagram and Example

 PRODUCTION POSSIBILITY CURVE 

It is known that wants of people are unlimited and the resources to fulfill those wants are not only limited but have alternative uses as well. Hence, this poses a problem of which wants to be fulfilled.

What are Production Possibilities? 

Nations as a whole also face the same problem of choice. The total resources available to a nation are limited while the people in a nation have not only unlimited wants but the wants are varied as well; for example land resources, mineral resources, labour, capital etc. are limited in a nation. Some nations may have more resources than others, but still the resources available to them are not unlimited. So, the problem which nations face is how to distribute these resources into the production of different goods and services; or to state in other words how to allocate these resources for the production of various goods and services so that maximum wants of the people are satisfied.

A given combination of resources or factors of production gives rise to a certain level of output. A different combination of the same available resources may give rise to another level of output. So, in this way, different combinations of the resources or factors of production gives rise to different levels of output or different production possibilities. Here, we bring in the concept of Production Possibility Curve (PPC) or Production Possibility Frontier. 

To simplify, we assume that there are only two goods that can be produced in an economy with the given resources and technology -let’s say wheat and rice. The Production Possibility Curve shows the different combinations of output i.e wheat and rice which can be produced with the given available resources and technology in a nation. We assume that for any given level of output, the resources are fully utilized and the technology is constant.

Example and Diagram

Let’s take an example, suppose a nation can produce two goods wheat and rice in an economy on a limited piece of land, with the given resources and technology. 

Combination

Units of Wheat

Units of Rice

A

10

0

B

9

1

C

7

2

D

4

3

E

0

4

Now, with the given resources and technology, the nation can produce various of Wheat and Rice. At a point A, the nation is producing 10 units of Wheat and 0 unit of Rice. This means that the nation is devoting all of its resources and technology to the production of Wheat and none to rice. 

At a point B, some of the resources are now put in the production of rice, so the nation produces 9 units of wheat and 1 unit of rice. 

At a point C, 7 units of wheat and 2 units of rice and so on. 

At the Point E, all the resources and technology are devoted to the production of Rice, so the nation produces 4 units of rice and not any wheat. 

When the nation is making full use of its resources with the given technology, it can be on any of the points A, B, C, D or E which are known as production possibilities. 

Plotting these points on a graph, we get a Production Possibility curve (PPC). All points on the curve show the different combinations of the two goods i.e Wheat and Rice which can be produced when the resources are fully utilized given the technology.



Why do we assume technology to be constant for a given PPC?

When determining a PPC, we assume that the technology is constant. This is because technology is one such factor, which can increase production without the increase any resources. For example, the HYV (High Yielding Variety) seeds which were introduced during Green Revolution in the 1960s in India. These seeds could produce up to ten times more as compared to other seeds on the same piece of land, without increasing any other resource. So, we keep this factor constant when determining the PPC so we can find out how a change in combination of resources alters the level of output.

Key Points

  • Nations face the problem of how to allocate resources for the production of various goods and services so that maximum wants of the people are satisfied.
  • The Production Possibility Curve shows the different combinations of output which can be produced with the given available resources and technology in a nation. 

 

Labels:

Popular Posts

Understanding Trade-Offs in Economics: Balancing Choices for Optimal Outcomes

  TRADE-OFFS  Economics is concerned with people making decisions. However, these decisions are not always easy to make as making a decision involves making a choice. This choice may be between different alternatives/goals/options. Generally, choosing one goal means not being able to choose the other one. This results in what we call a trade-off where in order to choose one thing we have to let go or sacrifice the other one. Examples of Trade-Offs:  P eople face numerous trade-offs in their daily lives. Let’s say a person wants to reach his office. He may either go by car or bicycle. Going by a bicycle is not only environmentally friendly but also is a good exercise. However, going by a car will save time and make him reach faster. This is a situation of trade-off where the person has to choose an option and in choosing one, he will be giving up the other one. A family which has a limited monthly budget has to decide whether to spend that money on a vacation, saving for their chil
Read more

What are Consumer Goods, Capital Goods and Intermediate Goods? With Examples

  Consumer Goods, Capital Goods, Intermediate Goods After the production of a good or service, the next aim of the producer is to sell the good to the consumer. The consumer can be an individual or a firm; and the good when sold to the consumer can be consumed as it is or the good can be transformed into another good with the help of a productive process such as a machine.  For example, when wheat is sold to a flour mill, it is converted into flour through the use of machinery. When a good is transformed into another good like in the case of wheat, it loses its specific characteristic during the production process.   Such type of a good is known as intermediate good. When the goods are not further transformed into other goods, and are used as it is, it is known as final goods. So, the final goods are those which do not pass through any further production process or transformation and are used as it is by the consumers. The final goods can be of two types- Consumer goods and Capital
Read more

Consumer's Equilibrium using Marginal Utility Analysis

The Law of Diminishing Marginal Utility It has been observed that the desire to consume a commodity decreases as more and more units of that commodity are consumed. Therefore, every successive unit of the commodity consumed provides lesser utility than before. The Law of Diminishing Marginal Utility states that as more and more units of a commodity are consumed, the Marginal Utility derived from every successive unit of the commodity declines.  This happens because psychologically, as a consumer starts to consume one unit of the good after another, the the consumers satisfaction reaches a saturation point. So, with every successive unit consumed, the additional utility the consumer derives goes on declining.  Consumer's Equilibrium using Marginal Utility: Cardinal Analysis Consumer's equilibrium is that level of consumption at which the consumer is getting maximum satisfaction (benefit) while spending out of his given income across different goods and services, and has no tende
Read more