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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. 

 

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