The Production possibility curve (PPC) is a curve that shows all maximum possible combinations of two goods and services which a country can produce using all available resources with efficient technique of production at a given state of technology.
Assumptions of PPC
- Suppose there are only two goods produced in a country: Laptops and Phones.
- Suppose the economy is working at full employment. All available resources are utilized to produce goods and services and quantity of resources is fixed.
- Assume that country is using best available technique of production, i.e., Productive Efficiency (a situation where it is impossible to produce more of one good without sacrifice of other.)
- Finally, it is assumed that state of technology will not change in the given time constraint.
The diagram below shows the production possibility curve of a country producing laptops and phones assuming that all available resources are fully employed in the most efficient way at present state of technology.
- If all resources are allocated in Phones production the economy will be at point ‘A’
- If all resources in Laptops production the economy will be at point ‘B’
- A curve joining ‘A’ and ‘B’ is PPC as shown below
Points ‘A’ and ‘B’ may be joined by a straight line or an inward bending curve as shown below:
Hence, PPC may be of three shapes, i.e., outward bending, inward bending, or a straight line.