Why shifts in production possibility curve take place? How managers can understand & exploit production efficiencies?

When you graph production possibility schedule on a plot, you get a downward sloping curve which is termed as production possibility curve. It shows alternative production possibilities of two sets of goods with the given resources and technology. It is also called production possibility boundary or frontier because it shows the limit of what it is possible to produce with available resources. A few definitions are:

“The production possibility curve is that curve which shows the possible combinations of two goods that can be produced by an economy, given available resources and technology.”- Richard G. Lipsey

 “The Production Possibilities Curve (PPC) models a two-good economy by mapping production of one good on the x-axis and production of the other good on the y-axis. The combinations of outputs produced using the best technology and all available resources make up the PPC. Points inside the PPC result from inefficiency; output combinations outside the PPC are impossible to produce” - - chegg.com

“A curve that illustrates the production possibilities of an economy--the alternative combinations of two goods that an economy can produce with given resources and technology....The law of increasing opportunity cost is what gives the curve its distinctive convex shape.” amosweb.com

“A production possibility curve represents all the possible combinations of two goods that can be produced if currently available resources are fully employed using the available technology” – K.G.Arora

A Real Life Example of Production possibility curve

You can explain the production possibility curve, classically,  with war goods and consumer goods (guns and butter). You can take this real-life situation to simplify the concept further. 

Sialkot, a Pakistani city, is famous worldwide for its sports products, especially for its excellent quality footballs, hockey sticks, cricket bats and baseball bats. The Adidas Brazuca was used in FIFA World Cup 2014, which was a product of a Sialkot firm.

Due to the high level of competency in this sports-product oriented industrial area, small to medium manufacturers have been smartly switching to less range of products, to reap the benefits of specialization factor regarding production, skill, and professional dexterity.

Here is an interesting example of how production possibility curve may help you planning on making the production decision. Suppose, your firm is specialized in making cricket bats and hockey sticks only. It means if one of these products is selected, the other is given up accordingly. The decision is all about concluding upon an optimal level of production while being cautious for any possible opportunity cost. You have 100 artisans, working for an 8-hour shift per day. Further details are as followings:

Cricket Bats produced/hour=50

Total production/day=400 bats

Hockey Sticks produced/hour=100

Total Production/day=100x8=800 sticks

As you can see in the following table, various combinations of both alternatives result in different outputs. Don’t confuse yourself into guessing which combination might be optimal for the prime purpose of this illustration, is to explain how the “frontier” of production possibilities form.

Time Producing Hockey Sticks

Time Producing Cricket Bats

Total Hockey Sticks Produced

Total Cricket Bats Produced

8

0

800

0

6

2

600

100

4

4

400

200

2

6

200

300

0

8

0

400

Frontier is the curve (shown as the blue incline line), market by (0,800), (100,600), (200,400), (300, 200) and (400, 0).

The (0, 800) combination shows that you decide only to make hockey sticks during a whole 8-hours work shift. While the (400, 0) combinations exhibit the choice of selecting only the cricket bats for production. You can see how the in-between combination represents a “tradeoff” between both production alternatives.

production possibility curve

The shape of curve and opportunity cost relationship

In the above figure, you can see the frontier as a straight slope line. This is because the resources required to produce both products are very much similar. So to produce a certain quantity of hockey sticks, you have to give up the cricket bat production level with the same ratio. This is called the “constant opportunity cost” effect. It is the highest-valued alternative forgone to get the other. The PPC will enable you to calculate opportunity cost.

The downward slope also exhibits the inverse relationship between the quantities of both products, thus explain further the tradeoff aspect.

While the curve in the below courtesan plain shows “increasing opportunity cost.” The curvy shape indicates that the resources, i.e., plant, technology, etc. to manufacture both the cranes and trucks are not similar.

Opportunity cost can be obtained at any level through simple subtraction of consecutive or randomly selected output levels.

Scarcity and Inefficiency issues regarding PPC

All the combinations in the region following the extent of PPC, are all inefficient combinations. If you choose any of these inefficient points, you may suffer more cost of production or even a loss at the bottom of your balance sheet.

What a point on, inside and outside of the curve says?

You can see (50, 400) in the first figure, is a possible but inefficient point for production. Y also represents it in the figure below. It means the best efforts regarding production level along optimal quantities of one or both of alternatives have not been met.

On the other hand, any point of combination beyond the frontier curve or outside the curve is impossible or unreachable for you because of a scarcity of resources, represented by X in the figure below. All maximum possible achievable combinations A, B, C, D, and E, as shown in the figure below lie on the curve itself. All points on the frontier curve don’t guarantee the best or “optimal” level of production as PPC does not pinpoint it.

Utility of production possibility curve for production decisions

The Production frontier curve is mainly used to handle concepts of scarcity, efficiency and opportunity costs. It also handles issues related to choice and decision making. It can help managers to resolve a few central problems in production:

What to produce and how much? 

It is the most critical problem for any production manager. Resources are limited, so you have to choose amongst various options for producing different goods and services.

How to produce? 

It is another crucial issue for a production manager when resources are limited, and opportunity costs involve in every situation. What techniques of production are to be used? When an economy fails to choose an appropriate option, then the actual output of the economy may suffer.

How to utilize resources fully? 

The PPC provides ways to utilize resources for efficiency in efficiency fully.

How to achieve economic growth? 

We have seen a shift in production possibility curve. The upward shift takes place whenever economic growth of production occurs. The shift can take place for two main reasons; increase in capital stock or improvement in technology.

Possibility Possibility Frontier

Scarcities of resources and management


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