Figure 5.10 shows that technical progress brings about a greater increase in capital goods than in consumer goods CD > AB, while a greater increase in consumer goods than in capital goods, AB > CD.īy relaxing the assumptions of the fixed supply of resources and of short period, the production possibility curve helps us in explaining how an economy grows. At the same time, it releases resources which can be employed to raise the output of capital goods. Increased productivity in consumer goods industry makes it possible to increase the output of this industry. It may be noted that even though technical progress is limited to one product, it enables the economy to have more of both goods. If technical progress takes place in the production of only one of the two goods, say consumer goods, the new production possibility curve will be PP 1 in Figure 5.9. Given the supplies of factors, if the productive efficiency of the economy improves by technological progress, its production possibility curve will throughout shift outwards to P 1P 1 It will lead to the production of more quantities of both consumer and capital goods, as shown by the movement from point A on PP 0 curve to point С on P 1P 1 curve. Suppose the economy is producing certain quantities of consumer goods and capital goods as represented by the production possibility curve PP 0 in Figure 5.8. Technical progress enables an economy to get more output from the same quantities of resources.īy relaxing the assumption of given and constant production techniques, it can be shown with the help of the production possibility curve the increase in the production of both the goods than before. The production possibility curve is of much importance in explaining some of the basic facts of human life like the problems of unemployment, of technological progress, of economic growth, and of economic efficiency. Uses or Applications of the Production Possibility Curve: It is said to be “technologically infeasible or unobtainable”. Any combination lying outside the production-possibility frontier, such as K, implies that the economy does not possess sufficient resources to produce this combination. Such a combination is said to be “technologically inefficient”. Such combinations are said to be “technologically efficient”.Īny combination lying inside the production possibility curve, such as R in Figure 5.6, implies that the society is not using its existing resources fully. The production possibility frontier depicts society’s menu of choices.” This is what McConnel calls the ‘optimum product-mix’ of a society.Īgain, all possibility combinations lying on the production possibility curve (such as В, С and D) show the combinations of the two goods that can be produced by the existing resources and technology of the society. Substitution is the law of life in a full-employment economy. As put by Samuelson: “A full-employment economy must always in producing one good be giving up something of another. The production possibility curve further shows that when the society moves from the possibility point В to С or to D, it transfers resources from the production of good Y to the production of good X. The rate of transformation on a production possibility curve increases as we move from point В to С and to D. This curve not only shows production possibilities but also the rate of transformation of one product into the other when the economy moves from one possibility point to the other. Each production possibility curve is the locus of output combinations which can be obtained from given quantities of factors or inputs. This is the production possibility curve which is also known as the transformation curve or production possibility frontier. The concave curve PP 1 depicts the various possible combinations of the two goods, P, В, C, D and P 1. Units of good X are measured horizontally and that of Y on the vertical axis. Table 5.1 is represented diagrammatically in Figure 5.6. For example, to reach the possibility С from B, the economy produces 50 units more of X and sacrifices 30 units of Y whereas in possibility D for the same units of X, it sacrifices 50 units of Y. In other words, the economy withdraws the given quantities of factors from the production of Y and uses them in producing more of X. The production possibility schedule shows that when the economy produces more units of X, it produces less units of Y successively. The economy can produce 100 units of X and 230 units of Y in possibility B 150 units of X and 200 units of Y in possibility C and 200 units of X and 150 units of Y in possibility D.
0 Comments
Leave a Reply. |