Limitations exists on the maximum production possibility of limited resources in a given situation.
Resources have alternative uses.
The line drawn on combining the maximum combinations of outputs using the existing stock of resources fully utilizing with maximum efficiency is known as the production possibility frontier.
The Production possibility frontier is identified by alternative names as: Production possibility line.
Production possibility curve is developed using the assumptions mentioned below.
Produce only two goods
Stock of resources is fixed
Existing technology does not change in the given period of time
Resources are fully utilized with maximum efficiency
The factors mentioned below determine the production possibility in a country
Stock of resources
Productivity of the resources Slope or the gradient of a production possibility curve can be identified as the ratio of movement along the production possibility curve, the forgone amount of the other goods when a fixed amount of a certain good increases. According to the behavior of the gradient of the production the possibility curve or marginal opportunity, cost, the production possibility curve exists in three shapes as given below .
Straight line
Concave to the origin
When moving along the production possibility curve by increasing the fixed amount of a certain good the amount forgone from the other good is considered as the constant production possibility curve.
Due to following reasons the opportunity cost becomes constant
Homogeneous Resources
Resources efficient for one industry and is the same for the other industry also
The production possibility curve that is concave to the origin is the increasing opportunity cost
If the forgone amount of the other good increases while increasing a fixed amount from a certain good when moving along a production possibility curve, is known as increasing opportunity cost
The reasons mentioned below affect increase opportunity cost
Resources are non homogeneous
The resources efficient for one industry are not efficient for the other Industry in the same way.
