![]() This is an explanation of the law of diminishing returns and it occurs because not all factor inputs are equally suited to producing items as we move down the PPF, as more resources are allocated towards Good Y the extra output gets smaller – so more of Good X has to be given up in order to produce Good Y We normally draw a PPF on a diagram as concave to the origin i.e. Services an economy can achieve when all resources are fully and efficiently one million metres of cloth.Frontier (PPF) shows the maximum possible output combinations of two goods or Again when we move from B to C, economy is required to give up two million quintals of wheat to get one additional unit i.e. In figure when we move from A to B, economy has to forgo one million quintals of wheat. It shows the operation of the law of increasing opportunity cost. Production possibility curve is concave to the origin. In figure when the economy moves from combination B to C, economy has to give up two million quintals of wheat to get one million metres of additional cloth. Production possibility curve slopes downwards to the right shows that economy has to forgo some quantity of one commodity to get more quantity of other commodity. ![]() Production possibility curve has two main features as explained under: 1. Features of Production Possibility Curve : (e) The prices of factors of production are constant. (d) There is full employment in the economy and (c) The techniques of production are constant. (b) The quantities and qualities of factors of production viz., land, labour capital etc. (a) The economy produces two commodities only. The production possibility curve is based on certain assumptions: Here we should remember that any combination beyond AF curve does not possess sufficient resources. They are also known as ‘Technologically Efficient’ or ‘Optimum Product Mix’. The economy has to choose out of these various combinations, which can be produced by existing resources and technology. Similarly B, C, D and E show the different combinations for two different goods i.e. Each production possibility curve is the locus of output combination which is obtained from given factors or inputs. The concave curve AF shows the join of various possible combinations which gives a curve known as transformation curve or production possibility frontier. 1, on OX axis, we have measured cloth in million metres while on OY axis we have taken wheat in million quintals. Economy can produce maximum 5 million metres of cloth or 15 million quintals of wheat. With the help of above table, we can show production possibility curve in respect of cloth and wheat. Thus we shall have to scarcities one for the other. In between these two extreme possibilities, there are many other alternatives. Let us, now further suppose that within the existing conditions only 5 million meters of cloth can be produced, with all the resources at our command.Īlternatively, if all the resources are used for the production of wheat, we can produce 15 million tonnes of food grains. If all the resources are put to produce cloth, then the maximum of cloth will be produced per year, depending on the quantitative and qualitative resources and the technological efficiency. ![]() ![]() Let us assume that two commodities are to be produced say, cloth and wheat. The curve that shows these alternatives is called production possibility curve. In this way available resources can be used alternatively to produce different combinations of goods and services. We also know that an increase in the production of one commodity reduces the production of other commodity. Again there is a maximum limit to the quantity of goods and services which an economy can produce with full use of its available resources and technology. We know that an economy always faces the problem of resource allocation i.e. ![]()
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