The Production Possibilities Curve is a graphical representation showing various maximum combinations of output that can be produced with the limited economic resources in a fixed time period
Assumptions of the Production Possibilities Curve
· Two goods are produced depicting choices and trade-offs for a nation.
· Full employment and Full production are achieved allowing for maximum utilization of resources.
· Short-run is the time frame over which resources cannot be improved or increased.
· The bow Shaped Curve is a number of Maximum combinations of product X and product Y that this hypothetical economy can produce in the short run.
· More X can be produced only with the sacrifice of good Y.
· The movement from a to b means less of good X produced. This will free up resources to produce more of good Y.
· Notice that the movement from a to b on the X axis allows a movement from d to e on the Y axis. Both are maximum combinations but a choice must be made.
· Notice that on the X axis, the distance from a to b and from b to c are essentially the same.
· The first sacrifice of resources to X ( a to b ) and the second sacrifice of resources to X, ( b to c ) are represented by equidistant movements to the left
· Notice that on the Y axis, the distance from 0 to d and from d to e are not the same. On the other hand, nations cannot produce a combination of X and Y that lies outside the curve. This is impossible in the short run due to some fixed resources such as land or capital.
· The first sacrifice of resources to X ( a to b ) Yielded a large gain in production of Y. The second sacrifice of resources to X, ( b to c ) yielded a significantly smaller increase in the production of Y.In the long run, new resources can be discovered, or new technology can improve productivity to increase output