(ii) Production possibility curve (PPC) and its role in solving economic problems

Production Possibility Curve (PPC) is defined as the locus of various combinations of two
goods that are possible to be produced with available technologies and resources under full and
efficient utilization. Production Possibility Frontier (PPF) is the another name of the Production
Possibility Curve (PPC).
To understand, let there be two goods X and Y- which an economy can produce with
available resources and technologies under full and efficient utilization . Let x denote the quantity
of good X, say a consumer good and let y denote the quantity of good Y, say a capital good.
With given technology and resources, suppose that the economy can produce the following
combinations of these goods:
Quantity of X(*) 0 30 60 90 120 150
Quantity of Y(y) 100 95 88 75 5080
Assuming full and efficient utilization of the available resources and technologies, the
economy can produce Ounit of good X with 100 units of good Y, or, 150 units of good X with
0 unit of good Y, or, any other combination in the table above.
Representing quantities of X on x-axis and those of Yon y-axis, ploting the combinations
and joining them by means of a smooth curve, we get a curve as shown in Figure 1.3.

Y
(0, 100) (30, 95)
95 (60, 88)
88
(90, 75)
Units75
of
Y

50 (120, 50)

|(us0, o)
X
30 60 90 120 150
Units ofX

FIGURE 1.3 Production Possibility Curve (PPC), showing various combinations of two goods which are
possible to be produced with given technology and resources being utilized at full employment and efficiency.
 Dvery ume, production of good X is increased by a given auivunt, production of good YIs
1oegone in successively increasing quantities. In other words, sacrifice of Y units for the sake
of an additional unit of X has a rising tendency as we go down the curve from lett to right. In
the language of economics, the opportunity cost of producing an additional unit of X, called the
Marginal OPportuniy Cost, or more popularly. the Marginal Rate of Product Transformation into
X0f Y, written as MRPTxy has a rising trend. MRPTy ycan be expressed as a ratio of quantity
of r toregone (Ay) to that of X gained (A) in exchange. It is the numerical value of Ay/Ar,
that 1s, MkRPTx,y=|Ay/Ar|, It can also be written as (-AylAx) or (-dyldx). Note that Ay/Axor
dylax represents slope of the curve (PPC), while MRPTy y is the numerical value of the slope.
While MRPTx,y (|y/Ax|or ldyldx|) increases along the curve from left to right, the slope (Ay/Ar
or dy/dx)decreases along it in the same direction. The table below demonstrates calculations of
the two for the data here and their varjations along the curve from left to
right.
TABLE 1.1 Production possibility schedule and MRPT, y
0 30 60 90 120 150
y: 100 95 88 75 50 0

Ay/Ax: -5/30 - 7/30-13/30 -25/30 - 50/30

(-0.17) (-0.23) (-0.43) (-0.83) (-1.67)

MRPTx, r= |Ay/Ax : 0.17 0.23 0.43 0.83 1.67

Marginal Rate of Product Transformation into X of Y, thus, is

Quantity of Yforegone
MRPTx, y= Quantity of X gained
-|Ay /Ax |
= -(Ay/A*
The slope (Ay/A) decreases from -0.17 to -1.67 along the curve from left to right, but
the MRPTy the numerical value of the slope, increases fronm 0.17 to 1.67. Thus, the slope
of the PPC (concave to origin, as in Figure 1.3) is a decreasing function of x while MRTPxy
(Marginal Rate of Product Transformation into X and ) is an increasing function of x. This is
so due to the implicit assumption of diminishing returns to scale in production. In the event of
constant returns to scale, the PPC is linear, sloping downwards. The slope of the PPC and its
MRPTy y are both constant. Likewise, when production follows increasing returns to scale, the
slopeof the PPC (convex to origin) is an increasing function of x while MRPTy yis a decreasing
function of x. Recall that dyldx represents the slope of the curve while ldyldx|or the numerical
value of the slope represents marginal rate of product transformation (MRPTx, ).