Explain production possibility curve.
Production Possibility Curve: Production possibility curve is a curve which depicts all possible combinations of two goods which an economy can produce with available technology and full employment of given resources. It has two characteristics,
- It is downward sloping from left to right, and
- The curve is concave to the origin because of increasing marginal opportunity cost or increasing marginal rate of transformation.
Effect of economic growth on the production possibility (PP) boundary: While making PP curve we assume resources and technology to be fixed and constant. Also, we assume that there is no economic growth. Change in either of them can shift the Production Possibility Curve (PPC).
If there is economic growth overtime, then an economy can get more of everything without having less, of anything. In other words, economic growth means that the economy’s capacity to produce goods is increasing through time and this would imply that production possibility boundary shifting outwards over time. It is shown in the following diagram:
Economic growth shifts the production possibility curve/boundary outward allowing more of all commodities to be produced. Before growth in productive capacity, points a and b were on the PPC and point d was an unattainable combination. After growth, point d becomes attainable, as to all points within the PPC after growth drawn ,in the above diagram.