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Describe a Production Possibility Curve, and its importance. Consider points on the PPC and inside the PPC to illustrate opportunity cost.

  • Essay length: 4853 words
  • Submitted: 19/06/2006
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University Degree Finance

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Question 1

(a) Describe a Production Possibility Curve, and its importance. Consider points on the PPC and inside the PPC to illustrate opportunity cost.

Production Possibility Curve is a curve illustrating all maximum output possibilities of two or more goods given a set of inputs. The PPF assumes that all inputs are used efficiently.

As indicated on the exhibit 1.1, points A, B, C and D represent the points at which production of grains and wines is most efficient. Point X demonstrates the point at which resources are not being used efficiently in the production of both goods and point Y demonstrates an output that is not attainable with the given inputs

The shape of this production possibility frontier also represents the concept of opportunity cost. Choosing more output of good X usually means giving up output of good Y. For instance, if the curve moves from point A to point B, the opportunity cost of 9,000 tons of grains is a reduction in output of 3,000 tons of wines.

As more of one product is produced increasingly larger amounts of other product must be given up. If a change in demand from

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