Question

Assuming that no resource is equally efficient in production of all goods, name the curve which shows production potential of the economy. Explain, giving reasons, its properties.

Answer 1

Assuming that no resource is equally efficient in production of all goods, the production possibility curve is the curve which shows set of combination of production possibilities of two goods with the given resources and technology.

Properties of PPC:-

1. PPC slopes downwards from left to right. It is because in a situation of fuller use of the given resources, production of both goods cannot be increased simultaneously. More of Good 1 can be produced only with less production of Good 2.

2. PPC is concave to the point of origin because to produce each additional unit of Good 1, more units of Good 2 will have to be sacrificed. Opportunity cost of producing every additional unit of Good 1 tends to increase in terms of the loss of production of Good 2. Production will act upon the law of increasing marginal opportunity cost.

3. Marginal rate of transformation increases as PPC slopes downwards from left to right.

4. All points which lie on the PPC are the set of combination of two goods with the full utilisation of resources and efficient utilisation of technology.