Production possibility frontier

Production possibility curve (PPC) is the locus of combinations of two commodities whose production fully and efficiently utilizes the available resources and technology in a given period of time. It shows the maximum output a county can produce with its present productive capacity of land, labour, capital and
entrepreneurial ability. It is also a graphical representation of the basic concepts of the discipline of economics, that is, scarcity, choice and opportunity cost: scarcity is implied by the unattainable combinations beyond the boundary; choice is denoted by the extent of the possibility of selection from the attainable points on the boundary; opportunity cost is depicted by the downward sloping nature (negative) of the production possibility curve. PPC is concave to the origin denoting increasing opportunity cost and the marginal rate of transformation (MRT) given by the absolute value of the slope of the PPC, which is due to the use of less and less suitable resources (resources are not equally efficient) and increased competition for resources which creates an upward pressure on factor rewards (prices measured in terms of the quantity of the other product given up), for example, an increase in wages to attract more or retain the same amount of labour or increase in rent in order to access and put more land into use.
Another reason for increasing opportunity cost is the Law of diminishing returns. This is because resources are not used in the same fixed proportion or intensity in the production of all commodities.
This means that as a nation produces more of a commodity, it must utilize resources that become progressively less efficient or less suited for the production of that commodity. As a result the country must give up more and more of the second commodity to release just enough resources to produce
each additional unit of the first commodity.

(Visited 22 times, 1 visits today)
Share this:

Written by 

Leave a Reply

Your email address will not be published. Required fields are marked *