Products and Resources:
Alternative Combinations:
It is an undeniable fact that commodities (i.e. goods and services) can be produced only by using some productive resources. Normally, each productive resource can be put to several alternative uses, and most commodities can be produced by several alternative combinations of productive resources.
A modern economy produces a large variety of products and is characterised by an increasing volume and variety of productive resources. Consequently, it is faced with a large number of alternative combinations of products and the productive resources to be used in their production.
Economists have devised a simple analytical tool to highlight the core of the above-stated complex phenomenon. It is variously known as the Production Possibility Curve (PPC), the Transformation Curve, or the Production Frontier of an economy.
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PCC of an economy is a graphic description of the alternative combinations of two goods (say X and Y) which it can produce with its existing stock of productive resources by using prevalent production technology.
Assumptions:
PPC of an economy is drawn on the following simplifying assumptions:
i. It has a given factor endowment.
ii. It cans productivity two goods, X and Y, with its productive resources.
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iii. Production of X and Y can be increased and decreased in extremely small quantities; that is, both goods are perfectly divisible.
iv. All factors of production are fully employed, so that the output of one commodity can be increased only by reducing that of the other.
v. There is no change in the prevalent production technologies.
Description:
When drawn on these assumptions, PPC of an economy is a continuous curve which is obtained by plotting all those pairs of quantities of X and Y which it can produce.
Explanation:
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This phenomenon of increasing opportunity cost can be easily explained as follows:
Non-liomogeneity:
Factors of production are not homogenous. Units of a given factor of production are not identical in quality and productive efficiency.
Factor Intensity:
The proportion (or intensity) in which factors of production are used varies from commodity to commodity.
As a result, to begin with, when a country increases the production of good X, those units of its productive resources start leaving Y which is most efficient in producing X, so that, in the process, only a small quantity of Y has to be foregone.
But as the production of X increases, those resources which are progressively less efficient in the production of X (and probably more efficient in producing Y than the preceding units which left Y) have to leave Y and move to the production of X. Therefore, each additional unit of X can be had by sacrificing an increasing quantity of Y.