Question
Explain the production possibility curve with a diagram.
✓
Answer
The problem of choice between relatively scarce commodities can be illustrated with a help of a geometric device known as the production possibility curve.
Assumptions:
The analysis of the production possibility curve is based on certain assumptions :
Explanation :The above schedule suggests that if all resources are used for food production a maximum of 500 tons of food can be produced, given the existing technology. Instead, if all resources are used for producing cars, 25 cars can be produced. In between these two extreme possibilities exist, if we are willing to give up some food, we can have some cars.
Diagram Explanation :→The quantity of food is shown on the x-axis and the number of cars on the y-axis.
→Six different production possibilities $P _1, P _2, P _3, P _4, P _5, P _6$ are shown.
→Point outside the curve P cannot be attained due to limited resources.
→A point inside the curve $P_7$ can be attained but at these points, resources are not fully employed
Assumptions:
The analysis of the production possibility curve is based on certain assumptions :
- The time period remains constant.
- Techniques of production are fixed.
- Only two goods can be produced from the given resources.
- There is full employment in the economy.
- Resources of production are fully mobile.
- The factors of production are given in quantity and quality.
- The law of diminishing returns operates in production.
| Production Possibilities | Quantity of food production in tons | No. of car produced |
| I | 0 | 25 |
| II | 100 | 23 |
| III | 200 | 20 |
| IV | 300 | 15 |
| V | 400 | 8 |
| VI | 500 | 0 |
Diagram Explanation :→The quantity of food is shown on the x-axis and the number of cars on the y-axis.
→Six different production possibilities $P _1, P _2, P _3, P _4, P _5, P _6$ are shown.
→Point outside the curve P cannot be attained due to limited resources.
→A point inside the curve $P_7$ can be attained but at these points, resources are not fully employed
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