One is unable to determine which points are allocatively efficient if one does not know the preferences. The points lying on the PPC show combinations of output that can be produced by efficient utilization of resources. (Related Blog: An Introduction to Capital Budgeting) The shape of the PPC will also depend on whether there are increasing, decreasing, or constant costs of production. The PPC stands concave to its point of origin on the graph which is a result of the increasing marginal rate of transformation. This is because it indicates that, to increase the production of one commodity, production of another has to be reduced. The features of production possibility curve are as follows: But in reality, these are not used or utilised entirely. The production possibility curve is based on assumptions as the market keeps changing constantly.Īssumption 1:- According to the production possibility curve, the economy is assumed to have only two goods which represent the entire market.Īssumption 2:- The supply of resources to the economy is assumed to be fixed or stay constant.Īssumption 3:- The technology or the techniques of production are assumed to be constant.Īssumption 4:- The production possibility curve assumes that all the resources are used efficiently and fully. It shows the combination of two goods when resources are fully and efficiently utilised, the technique of production remaining constant.Īssumptions of Production Possibility Curve Production possibility frontier refers to the collection of all possible combinations of goods and services that can be produced from the given amount of resources and a given stock of technological knowledge. It shows alternative possibilities of two goods that can be produced with the usage of the given resources and techniques of production. Production possibility curve is also known as Production Possibility Frontier or Production Possibility Boundary. In this blog we will analyse and understand what exactly a production possibility curve is, and the various aspects such as features, limitations, assumptions linked to it. (Related Reading: What is Economics? Keynesian And Behavioural Economics) A country or economy is able to produce more of one good only if it produces less of another.Īpplying the production possibility curve in an economy is important as it helps the economy to decide the combination of goods and services to be produced in order to achieve maximum resource efficiency. The production possibility curve can be used to speculate and demonstrate the economy of a country and when it reaches its greatest level of efficiency what should be or can be produced with the available resources.
(Related Reading: Difference between Micro and Macro Economics)
As a part of economics it also plays a major role in a country’s economic affairs. The production possibility curve falls in the category of macro-economics and is an important factor in business analysis.
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