Question

Explain the production possibilities curve. What does the slope of the curve represent? What factors cause the curve to move outward?

Answer 1

The production possibility frontier (PPF) is a graph that depicts all maximum output possibilities for two goods that can be produced by an economy, given a set of inputs consisting of limited available resources. The goods and resources that can be produced by an economy plotted on the production possibilities curve are considered as technically efficient, while the goods and resources that are lying beneath the curve signifies inefficiency. The PPF slope shows the rate at which production of one product can be redirected (with reallocation of resources of production) into production of the other. The production possibility curve is bowed outward from the origin because of the law of increasing opportunity costs and vice-a versa. The principle of the law of increasing costs states that once all factors of production (land, labor, and capital) are at maximum output and efficiency then the firm producing more will cost more than average. Thus it when a business continues to increase the production its opportunity cost raises thus the production possibility curve is bowed out