![]() The production possibility curve is also called transformation curve, because when we move from one position to another, we are really transforming one good into another by shifting resources from one use to another. In this diagram AF is the production possibility curve, also called or the production possibility frontier, which shows the various combinations of the two goods which the economy can produce with a given amount of resources. The following diagram (21.2) illustrates the production possibilities set out in the above table. This is due to the basic fact that the economy’s resources are limited. This means that, in a full-employment economy, more and more of one good can be obtained only by reducing the production of another good. As we move from A to F, we sacrifice increasing amounts of cotton. At B, the economy can produce 14,000 quintals of wheat and 1000 quintals of cotton.Īt C the production possibilities are 12,000 quintals of wheat and 200u quintals of cotton, as we move from A to F, we give up some units of wheat for some units of cotton For instance, moving from A to B, we sacrifice 1000 quintals of wheat to produce 1000 quintals of cotton, and so on. These are the two extremes represented by A and F and in between them are the situations represented by B, C, D and E. If, on the other hand, all available resources are utilized for the production of cotton, 5000 quintals are produced. It all available resources are employed for the production of wheat, 15,000 quintals of it can be produced. The following table gives the various production possibilities. We suppose that the productive resources are being fully utilized and there is no change in technology. Let us suppose that the economy can produce two commodities, cotton and wheat. If it is decided to produce more of certain goods, the production of certain other goods has to be curtailed. In other words, the economy has to choose which goods to produce and in what quantities. The productive resources of the community can be used for the production of various alternative goods.īut since they are scarce, a choice has to be made between the alternative goods that can be produced. As it moves from the origin to the x-axis, you can see that for very little increase in the number of automobiles, the number of forklifts falls significantly, and thus, the curve is steeper.The production possibility curve represents graphically alternative production possibilities open to an economy. The shape of the curve denotes the increasing opportunity costs as the curve is steeper. Therefore, the opportunity cost of one more forklift is 1/3 of 1 automobile. O p p o r t u n i t y cos t o f o n e m o r e f o r k l i f t = 2 6 = 1 3 So, the opportunity cost of one more forklift is as follows. To consume 6 more automobiles, the economy has to give up 2 units of forklifts at point C. Therefore, the opportunity cost for one more automobile is 0.45 units of forklifts. O p p o r t u n i t y cos t o f o n e m o r e a u t o m o b i l e = 9 2 = 4. ![]() So, the opportunity cost of one more automobile is as follows. ![]() To consume 2 more units of automobiles, it moves toward point D.Īt point D, the economy gives up 9 units of forklifts. When the economy is at point C, it consumes 4 units of automobiles and 21 units of forklifts. Is production at a point outside the production possibilities curve currently possible? Could a future advance in technology allow production beyond the current production possibilities curve? Could international trade allow a country to consume beyond its current production possibilities curve?. ![]()
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