Example of Production Possibility Curve

Suppose two goods, say Apple and Orange, are to be produced by using the available resources in the economy. Following is the hypothetical schedule and diagram of the possible combinations of these goods.

The graphical presentation of the above schedule is known as Production Possibility Curve. It is shown as below:

Observations:

• If the economy use all of its resources to produce Apples, then maximum of 15 units of Apples and 0 Oranges can be produced (shown by Point A).
• If the economy uses all of its resources to produce Oranges, then maximum of 5 units of Oranges and 0 Apples can be produced (shown by Point F).
• The points in between (from Point B to Point D) are different possibilities with combinations of Apples and Oranges.
• By joining points A, B, C, D, E, and F, we get a curve, known as the Production Possibility Frontier or Production Possibility Curve.
• AF curve shows the maximum limit of production Apples and Oranges.

Marginal Opportunity Cost (MOC)

It is the number of units of a commodity sacrificed to gain one more unit of another commodity. Under PPC, Marginal Opportunity Cost is always increasing. It means that more units of a commodity have to be sacrificed in order to gain one more unit of another commodity.

Marginal Rate of Transformation

It is the ratio of number of units of a commodity sacrificed to gain one more unit of another commodity.

Marginal Rate of Transformation measures the slope of PPC.

In the above example, 14 units of Apple and 1 unit of Orange (14A + 1O) can be produced by utilizing the resources available with full efficiency. However, if the economy decides to produce 2 units of Orange (2O), then it will have reduce the production of Apple by 2 units. Hence, in this case, 2A is the opportunity cost of producing 1O.

MRT = 2A:1O

As the resources available around us are scarce, we cannot satisfy all of our needs and wants. And even if all the resources in the economy are utilized in the best possible manner, their capabilities are restricted due to scarce resources. Therefore, we are forced to make economic decisions and choose among alternate goods and services to satisfy our wants in the best possible manner. Hence, society has to decide what to produce out of the infinite possibilities. The graphical presentation of this range of possibilities is known as Production Possibility Curve (PPC) or Production Possibility Frontier (PPF).