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Question
Define Production Possibilities Curve. Explain why it is downward sloping from left to right.
Solution
Production Possibilities Curve (PPC) refers to that curve which depicts various combinations of two goods and services that can be produced with fuller utilisation of a given level of resources in the most efficient way and with a given level of production technique.
A PPC is downward sloping curve that is concave to the origin. The downward sloping nature of the PPC is due to the law of increasing opportunity cost. According to this law, with the fuller utilisation of the given resources, in order to produce an additional unit of one good, some of the resources are to be withdrawn from the production of another good. This implies that for producing an extra unit of one good more and more units of other good are to be sacrificed.
In the above figure, consider the movement from point A to B. In order to produce one extra unit of Good X, 4 units of Good Y are to be sacrificed. Similarly, the movement from point D to E, 8 units of Good Y is to be sacrificed in order to produce an extra unit of Good X. This indicates the rising opportunity cost of producing Good X.
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