Insight to Why Production Possibility Curves are Bent outward?

Production Possibilities Curve

Production Possibility Curve is defined as

A Production Possibility Frontier (curve) shows the maximum number of alternative combinations of goods and services that a society can produce at a given time when there is full utilization of economic resources and technology.

Consider economy has only two types of product that it can produce (i.e.Wheat and Computers), the nature of these products is such that one require no skill and other requires sophisticated training.  Hence it can be assumed that half of the population is assumed to produce wheat and other half is trained to produce computers.

Lets build a case where, the new government has decided to produce all the computers, suddenly all the wheat producers have been forced to stop producing wheat, and involve in computer production.  Now the equilibrium in the economy is the extreme point on the x-axis on the curve showing maximum of computers and no wheat.

Production Possibilities Curve

Now after certain time period, economy realizes that we need food to eat to, so they allocate 50% of the labor for wheat production. Hence all the labor who were suited for wheat will happily start to produce wheat, and the economy will have equilibrium at D with half wheat and half computers.

Here the gain in wheat by half labor allocation is area A on y-axis and loss computers by half allocation of labor is area C on x-axis. It seem quite logical that area A will be greater than area C, as wheat producers who were producing computers where not as efficient in producing computers and when they left to product wheat, the loss of computers was not that big.

Now again government introduces the policy to produce wheat only, this means allocating the computer producers are moved to produce wheat. The equilibrium will be the extreme point on the y-axis on the curve where there will be maximum wheat and no computers.

Here the gain in wheat by allocating remaining half labor is area E on the y-axis and the loss in computers by shifting remaining half labor to wheat is area B on x-axis.  Now it is also logical to see the gain E is smaller than loss B, because we already employed the efficient ones for wheat the remaining labor which are employed now were efficient for computers, so they are not as suitable to produce wheat.

Hence we can see following reasons why this curve is naturally and should be bent outwards:

  • All the labor is not equally substitute-able.
  • So increasing number of labor in on sector causes the marginal product to fall.
  • If economy produces more than one product, then labor has choice to select the product in which he is interested or comfortable.
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