Production Possibility Curve and its Uses

 

 

Production possibility curve assumes that there is a trade-off between two types of goods. In most scenarios those two goods are capital goods and consumer goods. It compares production of two goods, and the allocation of resources to those two goods, so that we can meet optimum requirement of need of the society with maximum utilization of resources, with a given fixed set of inputs and outputs. It is a curved as described below. For any given point on the curve, there is one set of values, x and y. X describes a particular Quantity of Good and Y describes another Quantity of good. The combination of both for the same set of limited resources is given by the curve. It describes maximum utilization, and the production value anywhere below the curve is underutilization of resources and above the curve is production lag (resource lag) point. Depending on society’s requirements, any point on the curve will be feasible point.

Production possibility curve

Uses of Production Possibility curve:

  1. It can be used to evaluate economic policies, based on the possible consequences they might bring to the production curve
  2. Evaluate the technology of production, and the possibility to expand or contract production so as to develop the production techniques
  3. To understand whether the given resources are underutilized or not, and based on that extract framework to plan a policy for Economic development.
  4. To understand the status of Economic, i.e. if there is any growth in Economy or not comparing it with previous production curves.
  5. Slope of the curve can be used to understand the rate of substitution of one good for another without compromising the utilization mechanisms.
  6. Understand the effect of change in production Quantity with change in technology, inputs, market etc.
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