PRODUCTION POSSIBILITY CURVE

Hi readers!

Today, Let us understand about production possibility curve.

In a very simple language,

Production possibility curve is the locus of various combination of two goods or services which an economy can produce by mobilizing its available resources in its optimum way. It is also known as “Transformation Curve” because resources are transformed from one product to produce other product.

As we know that, Professor Lionel Robbins of London school of Economics had defined economics entirely in terms of scarcity and choice in his book “An Essay on the Nature and Significance of Economic Science” published in 1932 A.D.   

As per modern economists Prof. Lionel Robbins and his followers like Karl Manger, Peter, Stigler, Scitovosky etc. :-

• Human Wants are Unlimited (If one wants gets satisfied another creeps on)

• Means have alternative uses

• Wants differs in urgency (Some wants are more urgent than other)

• Means to satisfy those unlimited wants are limited

• Therefore, Problem of choice occurs

 These problem of an economy are graphically explained by the help of production possibility curve.

Assumptions made by Economists to apply the concept of Production Possibilities Curve:

• An Economy produces only two goods and services.

• All the available resources are limited and fully utilized

• There is no change in Resources and Technology

• Factors of Production are fully mobile from one use to other

On the basis of these assumptions, following production possibility schedule is prepared:

Production Possibilities	Product X (‘000 units)	Product Y (‘000 units)
A	0	20
B	1	19
C	2	16
D	3	12
E	4	5
F	5	0

Explanation of  Production Possibility Schedule:

On the basis of above assumptions, An Economy produces only two goods and services named Product X and Product Y at fully utilized resources. There are several production possibilities shown in above table from A, B, C, D, E and F.

In an economy there can be only three cases:

1. Produce only Product Y (Use all its resources to produce Y i.e Production Possibilities A)
2. Produce only Product X  (Use all its resources to produce X i.e   Production Possibilities F )
3. Produce some Product X and some Product Y (Diversify the resources to produce both goods i.e Production Possibilities B,C,D and E )

Representing the above Production Possibilities schedule in graph we find the following curve:

In the above figure:

OX and OY represents X-axis and Y-axis that shows Product X (‘000 units) and Product Y (‘000 units) respectively.

A is the point where only product Y is produced and F   is the point where only product X is produced. Similarly, B, C,D and E  are the various production combinations whereby both of the products are produced accompanying the above assumptions. A curve obtained by combining all the points from A  to F is known as Production Possibility Curve.

It is to be noted that, an economy can’t choose a point G or point H – as it violates the assumption of Production Possibility Curve.

• At point G - there would be some unused resources.
• At point H - there would be resource constraints.

Therefore, Production Possibility Curve is also known as “Transformation Curve” because resources are transformed from one product to produce other product.

However, the Production Possibility Curve may have shift ( Rightward or Leftward ) depending upon the following two main reason:

1. Change in Resources
2. Change in Technology

If there is positive change in Resources and Technology the Production Possibility Curve will shift upward to the right and if there is negative change in Resources and Technology the Production Possibility Curve will shift downward to the left.

This can be shown by following figure:

In the above figure:

OX and OY represents X-axis and Y-axis that shows Product X (‘000 units) and Product Y (‘000 units) respectively.

AF shows initial Production Possibility Curve. Similarly, A’F’ shows unfavorable change in Resources and Technology whereas A”F” shows the favorable changes in Resources and Technology in an economy. This has resulted shift in Production Possibility Curve. 

Here, A’F’ shows downward shift in Production Possibility Curve and A”F” shows upward shift in Production Possibility Curve.

Therefore, P.A.Samuelson has rightly remarked as -

“Production possibility curve is that curve which represents the maximum amount of a pair of goods and services that can be produced with an economy’s given resources and technique, assuming that all resources are fully employed.”