Production Possibilities Curve Flashcards
What is a production possibilities curve?
It is a curve that shows all maximum possible combinations of two goods and services a country can
produce using all available resources with efficient technique of production at given state of
technology.
What are the assumptions of a PPC?
- There are only two goods produced in a country.
- The economy is working at full-employment i.e. all available resources are utilized to produce
goods and services and quantity and quality of resources is fixed. - The country is using the best available technique of production i.e. efficient technique of
production (efficient technique of production is that technique of production whose output
cannot be exceeded by any other method in a given time period. - Finally, to construct a PPC and make it comprehendible, it is assumed that the state of
technology will not change in the given time constraint.
Why is the PPC always downward sloping?
PPC is always downward sloping because of the presence of trade-off (i.e. opportunity cost) between
the two goods. According to the basic assumption of PPC, as the country has used all of its available
resources in an efficient way, it is impossible to increase the production of one good without losing the
other. This is why PPC will always be downward sloping.
Why is PPC bowed outwards?
It is bowed outwards due to the inefficiency of producing one certain type of good. Or because of the law of increasing opportunity cost. Say for eg. That you have some labor skilled in growing plant A and some in growing plant B. If all of them start producing plant A. then those people who are skilled in producing plant B will relatively be inefficient in making plant A rather than plant B. So if some workers ( those skilled in plant B ) are now ordered to grow plant B, will work more efficiently and in the time they grew 2 plant As they will grow 5 plant Bs. So this makes that upon losing 2 plant As 5 plant Bs are produced. This law of increasing opportunity cost shifts the ppc outwards.
How to measure marginal rate of transformation or Opportunity cost?
Object sacrificed/ Object gained
What does a linear ppc line indicate?
That the opportunity cost is constant and both objects are equally efficiently produced with the limited resources.
How can land affect PPC?
Increase in resources found such as oil from the ground will shift ppc outwards (considering that the 2 products on the ppc are made from oil)
Incase there is depletion of oil. An oil factory catches fire and alot of oil is burned. The PPC will shift inwards
How does Labor affect PPC?
PPC SHIFTS OUTWARDS: 1) immigration > emigration 2) Higher retirement age set 3) lower school leaving age 4) employment of more women 5) improvement in health facilities, higher death rate more working labor PPC SHIFTS INWARDS 1) Emigration > Immigration 2) Lowering of retirement age 3) restricting women to work 4) poor health facilities 5) higher school leaving age
How does capital affect PPC?
PPC SHIFTS OUTWARDS
As more investment in capital is done more machines are bought , or a new innovative machine is found. These all shift PPC outwards
PPC SHIFTS INWARDS
As Capital depletes for eg. government bans a certain machinery as it is harmful for labor. Now the same thing is being produced with less efficient machinery. The overall productive potential will decrease as the same thing is being produced less efficiently hence ppc shifts inwards.
How does enterprise affect PPC?
An entrepreneur can make good decisions, like investing in some good machinery or holding a partnership with a bigger firm, these good decisions can shift ppc outwards.
Similarly bad investments can be made in which alot of money can be lost and some machinery has to be sold to sustain and thus productive potential decreases.
