production possibility curve is concave to the origin. explain with the help of a numerical example.....

Dear Student

Production Possibility Curve is the curve which shows the combinations of two goods and services that can be produced with fuller utilisation of a given amount of resources in the most efficient way and with a given production technology. It is also known as Transformation curve. PPC is concave to origin. This is because of the increasing opportunity cost i.e. in accordance with the law of increasing opportunity cost. 

In order to understand this, let us take an example.
Production Possibilities Consumer Goods
(units)
Capital Goods
(units)
A 50 0
B 48 1
C 44 2
D 35 3
E 0 4
In the above figure, as we move downwards along the PPC from left to right (i.e. from to E ), we observe that in order to produce more units of capital goods, the economy must sacrifice some amount of consumer goods. In other words, it reflects the opportunity cost of producing one good in terms of another good. For example, a movement from point to point implies that the economy is diverting resources from the production of consumer goods to the production of capital goods. In order to produce one additional unit of capital good, the economy is sacrificing four units (i.e. 48 – 44 units) of consumer goods. Thus, the opportunity cost of producing one additional unit of capital goods is 4 units of consumer goods. 

Now, similarly, a movement from point to point implies that in order to produce one additional unit of capital good, the economy is sacrificing nine units (i.e. 44 – 35) units of consumer goods. Thus, the opportunity cost of producing one additional unit of capital goods is 9units of consumer goods. 

Thus, we see that opportunity cost increases as we move downwards along the Production Possibility Curve. Hence, PPC is concave to the origin.



Regards

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