Question

What are the assumptions of production possibility curve? Mention the main characteristics of PPC.

Answer 1

Assumptions of Production Possibility Curve:
Production possibility curve is based on the following assumptions:

1. The quantity of productive resources has been fixed.
2. There is no change in technology.
3. All productive resources are fully planned.
4. Resources are not equally efficient in the production of all items. This means that the resources are transferred from one field to another, hence their production capacity decreases, thereby increasing the cost of production.

Characteristics of Production Possibility Curve:

Production possibility curve has two characteristics:

(i) The Production Possibility Curve Slopes Downwards to Right: The possibility curve of the downward side yield indicates that the economy should drop some quantities of a good to achieve an additional amount of other good, assuming that resources have been given and used in the most effective way. Thus, when we go from combination B to C, the economy needs to give up 2 thousand guns to produce 1 million kg of extra butter. The reason for this is that additional resources are required to produce extra butter, which must be transferred from the production of guns.

(ii) It is Concave from the Origin : A concave shaped production possibility curve indicates increasing opportunity cost. The opportunity cost of a commodity (say butter) is the quantity of the other commodity (say guns), which need to be given up to get one unit of it. Thus, when we move from combination A to combination B, the economy has to give up 1 unit (thousand) of guns (15 – 14 = 1) to get 1 unit (million kg) of butter, and as we move from B to C, the economy is required to give up 2 units (thousands) of guns (14 – 12 = 2) to get 1 additional unit (million kg) of butter, and so on.

The reason for the increasing opportunity cost (real cost) is that resources are not equally efficient in the production of all goods. Therefore, as we transform more and more resources from the production of guns to the production of butter, we have to draw those resources which are more suited to the production of guns. Therefore, the quantity of guns sacrificed will increase.