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Table of Contents
1.1 Production Possibilities Curve
Production-possibilities curve (PPC) or “transformation curve” is a graph that shows the different rates of production of two goods that an individual or group (society) can efficiently produce with limited productive resources.
1.1.1 Assumptions of PPC
- No resources are wasted
- Technology is same
- Lets consider the example of a person who is staying on an island and has to collect fruit or fish or a combination of both for this survival
- In option A, he is taking only 100 fruits and no fish… that means all his resources are spent in collecting fruits and he has no time for collecting fish.
- In option B, he opts to collect 1 fish, but for this 1 fish he will have to cut down his time on collecting fruits and he will lose 10 fruits.
- In option C, he opts to collect 2 fish and now his time for collecting fruit is even less; but now for this second fish he has to give up 20 fruits.
Why is opp. cost in terms of fruits is rising as more fish are collected
When 100% of resources were used to collect only fruits, more energy and resources are used in collecting later units as compared to initial units (law of diminishing returns). So when only 1 fish is collected, later units of fruits are lost which are not much; as we go on collecting more fish, initial units of fruits are also lost thus opportunity cost increases as more and more fish is collected.
1.1.3 Shift in Production Possibility Curve
When there is change in technology or resources, production possibility curve will shift to right or left depending on increases or decrease in the resources.
1.1.4 Production on a point inside Production Possibility Curve
When production is done at a point inside the PPC curve, it means resources are not fully utilized and there is lack of efficiency
1.1.4 Production on a point outside Production Possibility Curve
Any point outside PPC curve is not attainable, unless there is an improvement in technology / resources.