What is production possibility curve in economics?

What is production possibility curve in economics?

In business analysis, the production possibility frontier (PPF) is a curve that illustrates the variations in the amounts that can be produced of two products if both depend upon the same finite resource for their manufacture. The PPF is also referred to as the production possibility curve or the transformation curve.

What is production possibility curve with example?

The curve measures the trade-off between producing one good versus another. For example, say an economy can produce 20,000 oranges and 120,000 apples. On the chart, that’s point B. If it wants to produce more oranges, it must produce fewer apples.

Why the PPF is concave?

The shape of a PPF is commonly drawn as concave to the origin to represent increasing opportunity cost with increased output of a good. Thus, MRT increases in absolute size as one moves from the top left of the PPF to the bottom right of the PPF.

Why is PPF curved and not straight?

The first is the fact that the budget constraint is a straight line. This is because its slope is given by the relative prices of the two goods. In contrast, the PPF has a curved shape because of the law of the diminishing returns. The second is the absence of specific numbers on the axes of the PPF.

Can a PPF be a straight line?

A straight line PPF: A straight line PPF where the opportunity cost is constant. The slope of the PPF shows the rate at which the production of one good can be transferred to another. The slope is called the marginal rate of transformation (MRT).

Why is the PPC curved?

The Production Possibilities Curve (PPC) is a model that captures scarcity and the opportunity costs of choices when faced with the possibility of producing two goods or services. The bowed out shape of the PPC in Figure 1 indicates that there are increasing opportunity costs of production.

What is slope of PPC?

Slope of PPC shows the ratio between the loss of output and gain of output. The slope of production possibility curve is the marginal opportunity cost which refers to the additional sacrifice that an economy makes when it shifts resources and technology from production of one commodity to the other.

What is PPC explain with diagram?

The production possibilities curve (PPC) is a graph that shows all of the different combinations of output that can be produced given current resources and technology. Sometimes called the production possibilities frontier (PPF), the PPC illustrates scarcity and tradeoffs.

What is PPC and its properties?

The two basic property of production possibility curve are: It slopes downward from left to right- Production possibility curve slopes downward because both the variables involve in the equation are inversely related as one increase then other one decreases and vice versa because the resources are constant.

What is PPC and its features?

The two main characteristics of PPC are: Slopes downwards to the right: PPC slopes downwards from left to right. It is because in a situation of fuller utilisation of the given resources, production of both the goods cannot be increased simultaneously.

Why is PPC negatively sloped?

The negative slope of the production possibilities curve reflects the scarcity of the plant’s capital and labor. Producing more snowboards requires shifting resources out of ski production and thus producing fewer skis.

Why is PPC downward sloping?

The downward sloping nature of the PPC is due to the law of increasing opportunity cost. According to this law, with the fuller utilisation of the given resources, in order to produce an additional unit of one good, some of the resources are to be withdrawn from the production of another good.

What is the shape of a PPC curve?

When the PPC is a straight line, opportunity costs are the same no matter how far you move along the curve. When the PPC is concave (bowed out), opportunity costs increase as you move along the curve. When the PPC is convex (bowed in), opportunity costs are decreasing.

What are the properties of PPC?

The two main characteristics of PPC are:

  • Slopes downwards to the right: PPC slopes downwards from left to right.
  • Concave to the point of origin: It is because to produce each additional unit of commodity A, more and more units of commodity B will have to be sacrificed.

What does a point below PPC indicate?

A point below PPC like F, depicts inefficiency or underutilisation of available resources. In other words, we can say that points that lie below the PPC such as point F are associated with underemployment of resources and inefficient utilisation of the available technology.

What is marginal rate of transformation?

The marginal rate of transformation (MRT) is the number of units or amount of a good that must be forgone to create or attain one unit of another good. It is the number of units of good Y that will be foregone to produce an extra unit of good X while keeping the factors of production and technology constant.

What are the 4 assumptions of the PPC?

The four key assumptions underlying production possibilities analysis are: (1) resources are used to produce one or both of only two goods, (2) the quantities of the resources do not change, (3) technology and production techniques do not change, and (4) resources are used in a technically efficient way.

Who gave the concept of PPC?

Gottfried von Haberler

What are the assumptions of PPC curve?

(1) Only two goods X (consumer goods) and Y (capital goods) are produced in different proportions in the economy. (2) The same resources can be used to produce either or both of the two goods and can be shifted freely between them. ADVERTISEMENTS: (3) The supplies of factors are fixed.

When can PPC be a straight line?

A PPC curve can be a straight line only if the marginal rate of transformation (MRT) is constant throughout the curve. A MRT can remain constant only if both the commodities are equally constant and the marginal utility derived from their production is also constant.

What is an opportunity cost example?

When economists refer to the “opportunity cost” of a resource, they mean the value of the next-highest-valued alternative use of that resource. If, for example, you spend time and money going to a movie, you cannot spend that time at home reading a book, and you can’t spend the money on something else.

What happens when opportunity cost increases?

Lesson Summary The law of increasing opportunity cost is the concept that as you continue to increase production of one good, the opportunity cost of producing that next unit increases. This comes about as you reallocate resources to produce one good that was better suited to produce the original good.

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