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Home » Economics Homework Help » Microeconomics Help » Production Possibility Curve
Production Possibility Curve
The issue of choice when resources are scarce and the opportunity cost of this choice and the nature of some basic economic problems can be better understood with the aid of an important graphic tool of modem economics known as production possibility curve. Production possibility curve is also called production possibility frontier. We shall explain below the concept of production possibility curve and brig out its relation with the basic economic problems stated above.

Production possibility curve (frontier) represents graphically alternative production possibilities facing an economy. In fact the producing possibility curve represents what economists call the opportunity set. an opportunity set is the group of options available in view of the given constraints. As will be explained below the scarce resources and the given technology are the constraints of the economy for producing goods and services. As the total productive resources to the economy are limited, the production of various alternative goods. It has therefore to be decided wich goods to be produced more and which ones less. In deciding what a mounts of various goods are the be produced society would in fact be deciding about reallocation of resources among different possible goods. How much labour and capital should go into raising wheat on the farms and how much should be employed for manufacturing cloth? How many factories should produce arm as for the army should produce consumer goods for the civilians? In order to simplify our analysis we shall assume that two types of goods –wheat and cloth – are to be produced assuming that the production of other goods and services remain constant. We shall explain the production possibilities of thee two goods but the analyst is made well equally apply to the choice between any other two goods.

Let us assume that here is a given amount of productive resources for the production of two goods namely wheat and cloth they remain fixed. A although resources are fixed in quantity yet they can be shifted from the producing f one goods to another. Further we assume that the given resources are beige used fully and with utmost efficiently in other words we assume that resources are neither unemployed nor under employed. This means that economy is working at the level of full employment and using its productive capacity fully. We also assume that technology does not undergo any change. In other words we rule out any progress in technology. In short we assume fixed resources full employment of resources economic efficiency in the use and allocation of the given resources and a given technology. All these assumptions imply that wise are looking at our economy at some particular point in time or over a very short period of time. This is because it will be very unrealistic to rule out progress in technology and growth in the supply f resource over a long period of time.

With the given amount of resource and a given technology we have constructed the following table showing various production possibilities between wheat and cloth. If all the given resource is employed for the production of wheat it is supposed that 15 thousand quintals of wheat are produced. On the other hand if all resources are devoted to the production of cloth 5 thousand meters of cloth are made. But these are the two extreme production possibilities. In between these two there will be many other production possibilities such as B, C, D and E.

With production possibility B the economy can produce with given resources 14 thousand quintals of wheat and one thousand meters of cloth, and with producing possibility C, the economy can have 12 thousand quintals of wheat and 2 thousand meters of cloth and so on. As we move from possibility a towards F we draw away some resources form the production of wheat and devote them to the production of cloth. In other words we give up some units of wheat in order to have some more units of cloth. As we move from alternative A to B we sacrifice one thousand quintals of whet for the sake of one thousand meters of cloth. That is one thousand quintals of wheat is the opportunity cost of one thousand meters of cloth Again our movement from alternative B to V involves the sacrifice of two thousand quintals of wheat for the sake of one thousand more meters of cloth. Thus the opportunity cost of one thousand meters of cloth has now gone up to 2 thousand meters of cloth. A lik at the table will show that our sacrifice of wheat (opportunity cost of cloth) goes on increasing as we move further form V towards F. it is therefore clear that in a full employment economy which is working with productive efficiency more of one goods can be obtained only by cutting down the production of another goods. Thus we conclude that with full employment and working with production efficiency) an economy must always give up something of one goods to obtain some more of another. The basic fact the resources are limited and fully employed prevents and economy from having more of both the goods.

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