Production Possibility CurvePaper Rating: Word Count: 451 Approx Pages: 2
The production possibility curve (PPC) shows all the combinations of two goods that an economy can produce with a given set of resources. The line is limited by four production factors â€œ
land which is classified as all of the natural resources available
labour, which is the human workforce
capital consists of buildings, machines and factories
entrepreneurship which binds the three factors together by risking money.
The graph below shows an example of the production possibility curve. This the simplest example of the concept and as a result is a straight line, not a curve:
The two goods being produced here are food and drink. Point A portrays a situation in which all of the resources involved in the production in the goods are geared towards drink, and no food is being produced. Te same can be said about B except it is the other way round. C is an approximate production equilibrium between the two goods. The one thing in common with these three situations is that the process of production is 100% efficient. This is virtually impossible in any economy in the world. Point D, however, is a very inefficient example. It is showing us that about only half of the resources available are being used in the production of the goods. Point E is simply impossible because the resources required to achieve that point are not available.
The line is moving out gradually with the advent of new technology and the discovery of new resources. Technology enables us to produce more goods with the same set of resources. Sometimes the technology will only be developed in a certain field which will will cause the PPC to pivot temporarily while the other areas catch up technologically. See the graphs below for more information:
This PPC is flawed in the fact that it is basically saying that the two products in question are perfect substitutes for one another, and no cost would be incurred if production shifted fro... Continue Reading