MICRO ECONOMICS

SEMESTER 1 YEAR 2018 -19

PRODUCTION POSSIBILITY CURVE

DATE: 25-09-2018

SUBMITED TO: SUBMITTED BY:

MR. DIGVIJAY SINGH KATOCH Shubham Mahajan

Roll no. -1120181904

ACKNOWLEDGEMENT

The success and final outcome of this assignment required guidance and assistance from many
people and I am extremely fortunate to have got this all along the completion of our assignment
work .I express my gratitude towards my subject teacher for giving me this opportunity to do
work on this and learn so much along the way .Ever encouraging seniors helped me at every step
of this assignment.

Furthermore, I would like to acknowledge the staff of Himachal Pradesh National Law
University, Who gave me the permission to access to all required equipment in completing this
project .This assignment, could not have been completed without each one’s help.
Table of Contents
ACKNOWLEDGEMENT …………………………………………………………………………………………2

WHAT IS PPC ……………………………………………………………………………………………………..4

EXAMPLE FOR PPC………………………………………………………………………………………………5

PROPERTIES OF PPC……………………………………………………………………………………………..6

USES OF PPC………………………………………………………………………………………………………..7

SHIFT OF PPC……………………………………………………………………………………………………...8, 9

ROTATION OF PPC………………………………………………………………………………………………..10

OVERVIEW OF PPC………………………………………………………………………………………………..11

CONCLUSION OF PPC……………………………………………………………………………………………..12
WHAT IS PRODUCTION POSSIBILITY CURVE?

Production possibility curve is the alternative production combination of two goods that an
economy can produce if it utilizes all available resources and technology fully and efficiently in
a given time period.

Production possibility curve is also known as production possibility frontier, transformation line
or transformation curve .In short PPC or PPF.

BASIC ASSUMPTIONS FOR PPC :

1.All the resources present in an economy are fully uttilised.

2.All the resources present are utillised with full efficiency.

3.Technology of the production remains constant.

PRODUCTION POSSIBILITY CURVE EXAMPLE

Let us suppose that the economy can produce two commodities, cotton and wheat, we suppose that the
productive resources are being fully utilized and there is no change in technology. The following table
gives the various production possibilities.

PRODUCTION POSSIBILITIES COTTON (IN 1000 quintals) WHEAT (IN 1000 quintals )
A 0 15
B 1 14
C 2 12
D 3 9
E 4 5
F 5 0

If all the available resources are employed for the production of wheat 15,000 quintals of it can be
produced .If, on the other hand all available resources are utilized for the production of cotton, and
5,000 quintals are produced. These are the two extreme represented by A and F and in between these
combinations there are situations represented by B, C, D and E. At B, the economy can produce 14,000
quintals of wheat and 1000 quintals of cotton. At C the production possibilities are 12,000 quintals of
wheat and 2000 quintals of cotton as, we move from A to F we give up some units of wheat for some
units of cotton and the amount of sacrifice of wheat keeps on increasing for additional units of cotton.

This means in a full economy more and more of one good can be obtained only by reducing the
production of another good .this is due to the basic fact that economy’s resources are limited.

1.PRODUCTION POSIBILITY CURVE http://www.economicsdiscussion.net/economic-

problems/production-possibility-curve-ppc/2054
PROPERTIES OF PRODUCTION POSIBILITY CURVE

1. PRODUCTION POSSIBILITY CURVE SLOPES DOWNWARD: Production possibility curve

slope downward from left to right .It is because in a situation of fuller employment of given
resources, production of both the goods cannot be increased. More of good X can only be
produced with less of good Y.

2. PRODUCTION POSSIBILITY CURVE IS CONCAVE TO THE POINT OF ORIGIN :It is

because to produce each additional unit of Good X , more and more units of Good Y will have to
be sacrificed than before .Opportunity cost of producing every additional unit of Good X tends to
increase in terms of loss of production good Y .In other words ,production will obey the law of
increasing opportunity cost .

SLOPE OF PPC: MARGINAL OPPORTUNITY COST, The rate at which

output in use 1 is lost for every additional unit of output in Use 2 implies marginal
opportunity cost (MOC).

PRODUCTION COTTON (IN WHEAT (IN 1000 SLOPE OF PPC

POSSIBILITIES 1000 quintals) quintals ) =MOC=LOSS/GAIN
A 0 15 ---
B 1 14 1/1 =1
C 2 12 2/1 =2
D 3 9 3/1 =3
E 4 5 4/1 =4
F 5 0 5/1 =5

2. INTRODUCTION TO MICROECONOMICS BY T.R. JAIN

3. PRODUCTION POSSIBILITY CURVE BY TUSHAR SETH http://www.economicsdiscussion.net/economic-
problems/production-possibility-curve-ppc/2054
USES OF PRODUCTION POSSIBILITY CURVE :

i. Enables the planning authority of a developed nation to divert the usage of its resources for the
production of necessary goods to the production of luxury goods and from consumer goods to
producer’s goods, after a certain point of time.

ii. Helps a democratic nation to focus and shift a major amount of resources in the production of
public sector goods instead of private sector goods. The public sector goods are supplied and
financed by government, such as public utilities, free education, and medical facilities. These
goods are free or involve a negligible cost. On the other hand, private sector goods are
manufactured by privately owned organizations and are purchased by individuals at a certain
price.

iii. Helps in guiding the movement of resources from producer goods to capital goods, such as
machines, which, in turn, increases the productive resources of a country for achieving a high
production level.

4.PRODUCTION POSSIBILITY CURVE BY NITISHA http://www.economicsdiscussion.net/production/production-possibility-curve-with-

diagram/3619
SHIFT OF PPC

A. RIGHTWARD SHIFT OF PPC: When the production possibility curve moves towards
right side and there is increase in the production of both good 1 and good 2 .

CAUSES: Increase in resources, such as increased adult population, increased immigration, improved
work ethics, increased spending on training and educating workers, increase motivation of workers, increased
retirement age, deceased school leaving age, increased female participation in labour force, increased occupational
and geographical labour mobility, discovery of more natural resources, infrastructure development, overcoming an
energy crisis, increased investment in productive capital etc can all shift a production possibility curve
(PPC)towards right.

Improvement in technology can also shift PPC towards right as improvement in technology results in lower cost of
production and same resource can be used to produce greater quantities.

5. https://rahul4economics.files.wordpress.com/2017/02/shift-in-ppc.pdf
6. Answer by KAMARA MALIK https://www.quora.com/What-causes-a-shift-in-the-production-
possibility-curve visited on 21 September 2018
B. LEFTWARD SHIFT OF PPC: When the PRODUCTION POSSIBILITY CURVE moves towards left
side and there is decrease in the production of both the good 1 and good 2.This is a situation not at all desired as it
may lead to recession in an economy prime example is the great depression of 1929 .

CAUSES: Decrease in availability of resources like less amount of capital left, labour migrating to other nation or
raw material available less .this might also happen when the resources available are not fully utilized like in case of
unemployment or lack of knowledge about particular resources .There is degradation of technology used for
production for good 1 and good 2.
ROTATION OF PRODUCTION POSSIBILITY CURVE

It happens when there is change in productive capacity (resources or technology) with respect to only one good. The rotation can be either for
the commodity on the X- axis or for commodity on the Y-axis.

(i) Rotation for commodity on the X-axis: When there is a technological improvement or an
increase in resources for production of the commodity on the X-axis (say, butter), then PPF will rotate
from AB to AC. However, in case of technological degradation or decrease in resources for production
of butter, then PPF will rotate to the left from AB to AD (Fig. 1.9).

(ii) Rotation for commodity on the Y-axis: A technological improvement or an increase in resources for
production of commodity on Y-axis (say, guns), will rotate the PPF from AB to CB.However, in case of degradation
in technology or a decrease in resources for production of guns, will rotate the PPF to the left from AB to DB as
shown in Fig. 1.10.

7. the Production Possibility Frontier (PPF): Assumptions, Characteristics and other Details by SMRITI CHAND
http://www.yourarticlelibrary.com/economics/the-production-possibility-frontier-ppf-assumptions-
characteristics-and-other-details/8834
OVERVIEW OF PRODUCTION POSSIBILITY CURVE

1. PPF slopes downwards, as an increase in production of one good requires decrease in production of the other.

2. PPF is concave shaped due to increasing MOC.

3. PPF shows transformation of one good into another, not physically, but by diverting resources from one use to the
other.

4. PPF shows the maximum available possibilities. The exact point of operation depends on how well the resources
of the economy are used.

5. If the economy operates on PPF (like points A, B or C), it means resources are fully and efficiently utilized.

6. If the economy operates at any point inside PPF (like point ‘D’), it means resources are not fully and efficiently
utilized.

7. Economy cannot operate at any point outside PPF (like point ‘E’), as it is unattainable with the available
productive capacity.

8. An outward shift in PPF from PP to P 1P1 means, that the economy can produce more of both the commodities,
which was not possible earlier.

9. An inward shift in PPF from PP to P 2P2 means, that the economy’s capacity to produce both the commodities has
reduced

8. The Production Possibility Frontier (PPF): Assumptions, Characteristics and other Details by SMRITI CHAND
http://www.yourarticlelibrary.com/economics/the-production-possibility-frontier-ppf-assumptions-characteristics-and-other-
details/8834
CONCLUSION

Production possibility curve helps in many ways for the authority to take suitable steps.
Those steps by which they maximize the satisfaction of the consumers, profit of producer
and social welfare of society keeping in mind the scarcity of resources that we have .Every
economy tries to have rightward shift of PPC but the basic question is how can this desired
situation be achieved . The authorities to achieve this must invest in education and training,
invest in research and development to develop new technology, increase in savings, create
investment friendly atmosphere, promoting the idea of globalization by opening trade
barriers and by discovering new resources .If with time authorities will not work on such
measures it can be said that in future we will face situations like the Great Depression of
1929 or the great recession of 2008 .