Production possibility curve

Production possibilities curve or frontier, as the name suggests is about various possibilities in production. It is used as a model in expressing the concept of economic constraints of scarcity.

There are four elements working in action within the production possibilities curve, and using the example above, these four elements are explained below.

1. The element of scarcity.

In the sample nation above, all resources of the country (land, materials, labour, etc) are used to produce two items, i.e. Radio or TV. Due to limitation of resources, the country can choose to produce all Radio (Y axis) total of 85 units at point A, or TV (X axis) total of 80 units at point E. Due to limited resources, if more TVs were to be produced, it has to forgo some Radios, hence the "trade off" or paying the opportunity cost of losing Radios. For instance, point B, 70 Radios and 25 TVs, it 

means forgoing 15 Radios (85-70) to get 25 TVs (0-25). Or point D, at 35 Radios and 60 TVs, where 

20 TVs were sacrificed (80-60)to get 35 Radios (0-35).

2. The law of increasing opportunity costs.

This means it is going to cost more eventually to swift the production from one item to the other. In the above example, when the sample nation is making only Radio and no TV (point A), the cost to sacrifice Radio in place for TV 

(point A to B) is 15 Radios for 25 TVs, ie one Radio for 1.67 TV

(Point B to C) is 20 Radios for 15 TVs. ie one Radio for 0.75 TV

(Point D to E) is 35 Radios for 20 TVs. ie one Radio for 0.57 TV

Hence, the cost is on an increase. The more you want anything, the more you have to forgo something else. In the above case, the more TVs you want, the more Radios you have to give up.

3. In a perfect efficient economy, it produces the combinations on the curve, any point between A and E. However, if the economy is not efficient, e.g. workers are lazy, the production will fall within the curve, point D.

And, due to the scarcity of resources, it is unable to product outside the curve, say point C.

4. Economic growth. It is illustrated in the above diagram by the arrow moving the curve from A-B to C. This is attainable by increasing the resources available, e.g. reclamation of land, better technology or better workforce (intellect - human capital). In real estate, it is like increase reclamation of land from the coastline, like Singapore or increase in construction technology where better building methods are employed in piling or putting up structures.

Source:

Video lecture on Production Possibilities Curve on Youtube: http://youtu.be/83m0_pCky50, and http://youtu.be/iEpgSkzXuT8.