A production possibility curve shows the different combinations of various commodities that producers can turn out, given the available resources and existing technology.
All combinations of commodities on the curve (a, b) represent maximum quantities attainable only as the result of the most efficient use of all available resources. Points lying inside the curve (u) are also attainable, but are not desirable as points on the curve. These points imply a failure to achieve full employment and full production. Points lying outside the production possibilities curve (w) would be superior to many points on the curve; but such points are unattainable, given the current supplies of resources and technology. The barrier of limited resources prohibits production of capital and consumer goods lying outside the production possibilities curve.
Since resources are
scarce, a full employment, full production economy cannot have an unlimited
output of goods and services. As a result, choices must be made on which goods
and services to produce and which to forgo. Production possibility curve helps
us to solve this basic problem.
Assumptions:
a) The economy is
operating at full employment and achieving full production.
b) The available
supplies of the factors are fixed in both quantity and quality.
c) The state of the
technological arts is constant.
d) Economy produces
two commodities.
Properties/Features:
a) Downward slope: The downward slope of the curve implies the notion of
opportunity cost.
b) Concavity: The concavity of the
curve reveals increasing opportunity cost.
Expanding
resources supplies, improvements in resource quality, and technological
progress cause economic growth, that is, an outward shift of the production
possibility curve.