Production Possibility Curve

Because resources, including raw materials, are scarce and limited in nature, producers are often faced with the question of, “What to produce?” and “How much to produce?”  Typically, such a problem is solved by allocating available resources in a way that helps to meet consumers’ demand effectively and in turn, generate substantial profits. However, the key to achieving it depends on producers’ ability to use an ideal combination of resources and figure out ways to lower wastage on all production aspects.

During their planning stage, several producers and manufacturers rely on well-crafted diagrams and charts to analyze and in turn, solve the problem of choice and resource allocation. Notably, the production possibility curve is one such medium that offers a fair idea about the feasible production goals and then proceeds to offer an insight into the favourable combination of resources. 

With that piece of information, are you all set to delve into detail about the production possibility curve in economics? 

As per the production possibilities curve definition, it is a graphical representation of all possible combinations of any two specific goods which can be produced in an economy.  Further, the analytical tool explains and addresses the problem of choice that allows producers to solve them effectively.  Additionally, it helps producers keep track of the rate of transformation of a specific product into another in a situation wherein the economy shifts from one position to another. 

In such a graphic tool, the maximum manufacturing capacity of a particular commodity is arranged on the X-axis, and that of other commodities is arranged on the Y-axis. The curve obtained tends to represent the number of products that a manufacturer can create with the limited resources and technology available at hand. 

To further understand this concept, one needs to take a look at a production possibilities curve example. However, before finding that out, one needs to become familiar with assumptions of the PPC curve. 

Check Your Progress: Before moving onto the next level, try to define the production possibility curve in your own words and provide suitable examples. 

What are the Assumptions of the Production Possibility Curve?

Let’s glance through the assumptions on which the production productivity curve rests –

1. Only two specific goods, namely, ‘X’ (consumer goods) and ‘Y’ (capital goods), are widely produced in an economy in different proportions.

2. The same combination of resources can be used for producing either one or both of the goods and can be freely shifted between them. 

3. The supply of resources is fixed but can be reallocated to produce both goods but within feasible limits.

4. All resources and available technology in the economy is optimally allocated and used.

5. The time duration is short.

That being said, let’s check out a hypothetical production possibility schedule and analyze it in the graphical format.

Production Possibility Schedule

Notably, the production possibility schedule is based on the Production possibility curve assumptions mentioned above.

Here, both P and P1 are the production possibilities of an economy that can produce either 250 kg of butter (X) or 250 kg of sugar (Y) as shown against possibilities P and P1. Nonetheless, as per assumptions, the economy must produce both commodities, thus giving rise to production possibilities like B, C and D accordingly.

As per the schedule, in the case of B - an economy can produce 100 kg of butter and 230 kg of sugar. On the other hand, in the case of C – it produces 150 kg of butter and 200 kg of sugar. Lastly, in the case of D – it can produce 200 kg of butter and 150 kg of sugar.

The general observation prevailing here is, as an economy produces more butter, it automatically produces less sugar. To elaborate, an economy reduces a portion of resources from the production of butter to produce more sugar.

Now let’s proceed to look at the graphical representation of the same example in the format of the production possibility curve.

In this PPC, butter (X) is measured horizontally, i.e. along the X-axis and sugar (Y) is measured horizontally along the Y-axis. The concave curve PP1 highlights various combinations of these two commodities P, B, C, D and P1.

Each transformation curve or production possibility curve serves as the locus of production combinations which can be achieved through allocated quantities of resources.  One can notice the rate of transformation on this curve as they move from point B to point C and then ultimately to point D. Also, there is a noticeable increase in the said rate of transformation. Since the curve shows that combinations B, C and D can be achieved with the available resources, they are labelled as technologically efficient combinations. 

Further, the production possibility curve ‘R’ lying on this curve indicates that the economy is not using its available resources efficiently. Similarly, the possibility of ‘K’ lying outside this PPC curve indicates that the economy does not have enough resources to produce the said combination. Both such combinations can be labelled as technologically unobtainable. 

DIY: Try to solve a project of your choice on the Production Possibility Curve from your textbook and find out if you can solve it without any help!

Now that we have gained substantial ideas about the production possibility curve, we should move on to finding its application in real life.

Application of Production Possibility Curve

• It helps to detect the unemployed resources in an economy.

• Explains the overall increase in production of both X and Y through technological progress.

• It comes in handy to understand the growth of an economy.

• Helps to understand the allocation of proper resources to increase production.

• Helps to understand economic efficiency in terms of production better.

• Offers an overview as to how to economize resources for production successfully. 

Do you want to learn more about applications of PPC in practical setup and access a detailed explanation of their graphical representation? Refer to Vedantu’s compact production possibility notes and strengthen your understanding of the fundamentals and other vital concepts effectively. Don't wait around, download the Vedantu app on your device now to jumpstart a fun and innovative way of learning.

About Production Possibility Curve

Production Possibility Curves (abbreviated PPC) is a technique for visualizing the trade-off between the marginal revenue (or benefit) of a project and its variable costs, where the project is represented by an arbitrary profit-maximizing project that can be built by varying the marginal cost of the project.  

The curve represents the potential profitability of the project by showing a series of points corresponding to the optimal amount of capital that can be used to maximize the project's profitability.

The name "production possibility curve" derives from the shape of a "production possibility frontier", i.e., the maximum possible combination of production levels and fixed costs. The term "production possibility frontier" itself was introduced by David Gordon in 1965 in the context of supply and demand theory.

History

Production Possibility Curves can be traced back to the work of British economist Arthur Pigou (1877-1947), who developed an economic model in his book Wealth and Welfare in the 1930s.  The "curve" was popularized by the work of Gordon in the 1960s, in his PhD dissertation and his 1965 textbook.

Overview

A Production Possibility Curve (abbreviated PPC) is a tool used to show the trade-off between the marginal revenue and marginal cost for a given project, or more generally any production function.  A production possibility curve can be constructed by plotting the ratio of the marginal revenue of a project (defined as marginal benefit minus marginal cost) against the marginal cost (cost plus opportunity cost, equal to marginal cost in competitive markets).  

Each point on the curve represents the optimal amount of capital that can be used to maximize the profitability of the project.  The marginal cost of the project is the cost of constructing the next unit of the project and is determined by the variable costs of building the project.  In order for the PPC to be symmetric about the y-axis, a project's marginal cost should equal its marginal benefit.  The PPC is usually based on the assumption that the firm is operating in a competitive market. 

A PPC can be constructed using either net profit or net income as the independent variable, as long as this variable is a function of the project's marginal cost and marginal benefit.  Both methods are discussed below. 

The PPC can also be constructed using production output as the independent variable, but for most production functions the output is a function of the project's output (see example). 

When the project is of the first type, the point of the PPC on the y-axis has the maximum capacity utilization.  This is the level at which the firm is operating.  As the marginal benefit goes down, the marginal cost will also go down.  As the marginal cost goes up, the marginal benefit will also go up.  Thus, there is always an optimal level of capacity utilization. 

The Production Possibility Curve (PPC) is a visual tool that helps managers, marketers and other decision makers understand the maximum output, cost and lead time (time to start production) from a given input or source.

The first Production Possibility Curve developed in 1980 by David W. Hounshell at the University of Virginia can be viewed on his website.  The PPC graph is similar to a Cost-Willingness Curve, which shows how much a firm is willing to pay or cost to obtain an additional unit of output (e.g., a more efficient product or process).  It differs from a cost-willingness curve because it is designed for use by a decision maker who faces a limited budget and has some output capacity to use.

Development of PPC

The PPC was developed by David W. Hounshell as a way of illustrating an optimization problem.  Such problems are common in engineering and production and can be represented by an “input space”, which defines a set of different inputs that may be made available to an economic system.  

The output is a set of choices (i.e., output alternatives) that are optimal from an economic point of view, whereas an economic system seeks to maximize production, profit, or other goals.

A production possibility set (or feasible set) of outputs is defined by a certain output set and a certain lead time.  The set of feasible lead times defines the range of choices to the production process (i.e., the input space).  The feasible set of outputs is defined by a certain output set and certain minimum input requirements.

The output set of alternatives is defined by certain costs (for example a quantity of output) and a certain lead time for the production of each alternative.  A production possibility curve (PPC) represents the set of feasible outputs when the production process starts at time zero and reaches the minimum lead time chosen for the process.  

It also represents the cost of each feasible alternative.  The curves are also used in economic modelling to describe the trade-off between various alternative uses of output.

A production possibility curve, therefore, is simply a curve representing the possible outputs (i.e., feasible outputs) of a process.  The cost is represented by the slope of the curve.  If the curve has a positive slope, then the curve represents a production possibility set, the curve has a negative slope represents a production restriction set, and the curve with a zero slope represents an impossible set of outputs.