- ► Introduction

chapter 1

our w

eco
th
As e
ants. Thus, the society must decide, what to produce out NI
choice is to be made between infinite possibillti th .
nomy with only two goods (say, guns and butter) Ee
. b h h , ..
- es, e economists
_,
. .
VJ att a1most infinite rang Oif
e
d
:'L:z · ·
possicn
assume a very basic
· onOll\lSts have traditionall
rhes. ,
this range of chmces y w at t ey call a Production Possibilit Sche ' y represented
schedule is graphically represented (Fig.1.1), it is called 'Prod!ctiondule ~~~ble 1.1): When this
'Production Possibility Curve (PPC). Possibility Frontier (PPF)' or
Production Possibility Frontier (PPF) refers to graphical~ .
epresentatton ofpossibl bi .
of two goods that can be produced with given resources and t h e com nations
the focus of various possible combinations of two goods that can b ecd nolo~. Al_ternately, PPF is
e pro uced with given resources and
techno logy.
1 Only 2 Goods are taken: The two goods have been taken just for th k of . ~
. H h I · ·
understandmg. owever, t e ana ys1s involved can be applied equally wellet sa e s.mplk1ty and easy
. .
_ _ __ , 0 any combination of goods.

PPF is also known by the following names:

• Production Possibility Curve • Transformation Boundary
• Production Possibility Boundary • Transformation Frontier
• Transformation Curve

Assumptions for PPF

Production possibility frontier is based on the following assumptions:
1. The amount of resources in an economy is fixed, but these resources can be transferred
from one use to another;
2. With the help of given resources, only two goods can be produced;
3. The resources are fully and efficiently utilised;
4. Resources are not equally efficient in production of all products. So, when resources are
transferred from production of one good to another, the productivity decreases;
5. The level of technology is assumed to be constant.
The concept of PPF can be better understood with the help of following imaginary (hypothetical)
schedule and diagram:
Table 1.1: Production Possibility Schedule
Guns Butter MRT= t1Guns
PossibilitieJ MOC t1Butter
0 (in units) (in units)
A 21 0 - -
20 1 1 1G: 18
B
18 2 2 2G: 18
C
3 3 3G: 18
D 15
4 4 4G: 1B
E 11
5 SG: 1B
F 6 5
6 6G: 1B
G 0 6
 Introductory Microecon ""'.
0
·••Its
Table 1.1 shows the various po . . . .
ssibilities of guns an d butter. This data is graphically represent~
in Fig. 1.1. \l
• lf the economy uses all its l y PPF of Guns and Butter
resources to produce on y
.
guns, then maxim um of 21 urn•ts f guns and no butter
° 21 A
can be produced (point' A'). . . ·• B
18 ---¼~ ~
• On the other hand, if all
resources are used for butte ~
r, 'E 15 ··· : : D
I I "
1
··· • ···
then maximum 6 units of bu :
tter and no guns can be § •-
I I J

12 - --~-- -~ -- -~ --- E
produced (point 'G'). .s : :
~ 9 :
• In between, there are vario C :
us possibilities with differen .~ 6 -- -~- I
I

t \J -- ~-- - ~-- -• ··· F

combinations of guns and bu I t I I

tter. I
I
t
t
J
1
I
I

• When points A, B, C, D, E, F 3 ~ : ~ :
and Gare joined, we get a : ~ :
-1 -- +- -- +- +- -+ -- G
curve AG, known as 'Production 0 1 2 3 4 5 -t6~~ ~ x
Possibility Frontier'. AG
curve shows the maximum Butter (in units)
limit of production of
guns and butter. Fig . 1.1
Marginal Opportunity Cost
(MOC)
MOC refers to the number of
units of a commodity sacrificed
commodity. In case of PPF, MOC to gain one additional unit of
is always increasing, i.e. mor another
have to be sacrificed to gain e and more units of a commod
an additional unit of another ity
commodity.

Increasing MOC operates becau

se productivity and e
they are shifted from one useto ~ of production decrease as
another.let 4 ' ~ 0 ~
an economy produces only two go l pof an example: Suppose
ods (say,gu~ - - M
guns because he is best suited for ~ t;mployed in production of
it If economy decides to reduc
production of butter, then worke e.production of guns and increa
r will be tra~sferred to prociuctl se
that efficient In production of bu on of butter. However, he is no
tter as he was in guns. As a rei t.
low and MOC will increase. hts productivity in butter will
be

Marginal Rate of Transform

ation (MRT)
MRT is the ratio of number of un
itsof a commodity 8'1Crificed to ga
in. an additional unit of anot
. MR ~ Units Sacrificed
commodzty. T= . .
· .
. In the given ex cq ,le o f~ aaA\>utle
~ Uruts Gamed r, MRT = AGuns .
MRT measures the slope of Prod AButter
uction Possibility Frontter~
Example of MRT
·•
According to Table 1.1, 20 un
its of guns and 1
by utilising the resources fully bapioduced
and e ·
has to cut down production of lhen it
guns by.__._
producing lB, i.e. MRT is 2G:1B ca,tol
.
- Chapter 1 ► Introduction

Characteristics or Properties of PPF

The two basic characteristics or features or properties of PPF are:
1. ppf slopes Downwards: PPF shows all the maximum possible combination of two goods,
which can be produced with the available resources and technology. In such a case, more ofone
good can be produced only by taking resources away from the production ofanother good. As there
exists an inverse relationship between change in quantity of one commodity and change
in quantity of the other commodity, PPF slopes downwards from left to right (see Fig.1.1).
2. PPF is Concave Shaped: PPF is concave shaped because of increasing marginal rate of
transformation (MRT), i.e. more and more units ofone commodity are sacrificed to gain an additional
unit of another commodity.
MRT increases because it is assumed that no resource is equally efficient in production of
all goods. As resources are transferred from one good to another, less and less efficient
resources have to be employed. This raises cost and !aises MRT. In the given example of
guns and butter, units of guns sacrificed keep on increasing each time to increase production
of one unit of butter.
Whether Economy will always operate on PPF?
It must be remembered that PPF does not show the point at which the economy will actually
operate. It only shows the maximum available possibilities, which an economy can produce.
The exact point of operation depends on how well the resources of the economy are used.
1. Economy will operate on PPF only when resources are fully and efficiently utilised.
2. Economy will operate at any point inside PPF if resources are not fully and efficiently utilised.
3. Economy cannot operate at any point outside PPF as it is unattainable with the available
productive capacity.
It means:
• Economy can either operate on PPF or inside PPP, known as'Attainable Combinations'.
• But, economy cannot operate outside PPF, known as 'Unattainable Combinations'.
Attainable and Unattainable Combinations
Let us clear the concept of 'Attainable y
and Unattainable Combinations' with
the help of Fig. 1.2: 21
• Any point on PPF (Points A to D)
Attainable Combinations: It refers to 18 or any point inside PPC (Point E)
those combinations at which economy ~ 15 are attainable combinations.
... • Any point outside PPF (point F) Is
can operate. There can be two attainable '§ 12
an unattainable combination.
options: C
;:.
"' 9
1. Optimum utilisation of resources: C:::,
C, 6
If the resources are used in the best E•
3
possible manner, then economy will ,'
operate at any point (like, A, B, C or 1 2 3 4 5. 6
D) on PPF. Butter (in units)
Fig. 1.2
 .. . •• ---'- •Vi T IYIJCroe
ffR NI corio llr1
Cs

2. lnef fi~i_e ~t utili sati on of reso urce ~: Ho~ eve

r, ~e a~tual prod ucti on can fall sho
n of reso urce s, then econo01rt of i~-~
capabilities. If ther e is was tage or inefficient utili satio Y lvilJ
ope rate at any poin t insi de the PPF (like E).
unt of available reso urce s •t . .
Unattainable Com bina tion s: With the give n amo
e than the give n poss ible ; 0 ~:-1.0l~ossibJe
for the econ omy to prod uce any com bina tion mor mations i.e.
econ omy can neve r oper ate at any poin t outside the PPF (like F).
an
PPF~ refer HOTS.
For •An economy always prod uces on, but not insid e, a
PPF and MRT
MR T y PPFa ndM RT
We can mea sure MRT on the PPF. For exa mpl e,
and
betw een the possibilities D and E is equ al to DH /HE 21
betw een E and F, it is equ al to EI/I F and so on. 18
of PPF
We kno w, PPF is conc ave shap ed curv e. The slop e
is a mea sure of the MRT. Since the slop e of a con
cave curv e .;;-
·c ... 15

increases as we mov e dow nwa rds alon g the curve,

the MR T ::,
g
12

also rises as we mov e dow nwa rds alon g the curv e. .,, 9
C
::,
\!1 6
Can PPF be a straight line?
,
PPF can be a straight line if we assume that MR T is constant
3
gain an
i.e. sam e amo unt of a com mod ity is sacr ifice d to
G
0 1 2 3 4 5 6
X
only
add ition al unit of ano ther com mod ity. It is poss ible Butte r (in units )
ient
whe n we assu me that all the reso urce s are equ ally effic
be a Fig. 1.3
in prod ucti on of all goo ds. In suc h case , PPF will
stra ight line as sho wn in Fig. 1.4.
y y

GoodY A

;:t --- --- -~ .!! B_ •X

O GoodX
Flg. 1.4

Can PPF be Convex to the Origin?

PP~ c~n be convex to the origin if MRT is decreasing, Le.
sacrificed to gain an additional uni t of another co
sha ped curv e as sho wn in Fig. 1.5.
It must be noted that both these
arise, as MRT always Increases. So,,
 _.. Introduction
Ch1pttr 1

ppf and Opportunity Cost ·ven u to produce that

The opportunity cost of n product is the alternative that mu st be gi_ cos f roducing more
product. PPP !llustrntes the concept of opportunity cost. The opportunity
blllft•r is {iwrr s111·1s. As we move from 'E' to 'P' (see Fig. 1.6 and Table l.l),
O
it:
~
rodudion of
nits
butter rises from 4 units to 5 units, but the number of guns decreases from 1l umts to 6 u '
i.e. opportunity cost of the 5th uni.t of butter is sacrifice of 5 units of guns.

If all the resources of the ;c~nomy are fully and efficiently utlllsed, then m~re of one good can be
produced only by taking resources away from the production of another good. The lost production
of such other good Is the opportunity cost of the first.

y
PPF of Opportunity Cost
21 A
B
18 C
-.. 15 D
-~
§ 12
C: · · •····• •······ E
~ 9
C:
:,
SGuns[i \
C, 6 ············· ··•···
,--::;-, F
3
-+--+--+---l- j....:1,....4,..- -~G=--_. X
0 1 2 3 4 5 6
Butter (in units)

Fig. 1.6

PPF as Transformation Curve

Slope of PPF indicates the ease or difficulty in transforming one good into another. In the
example given in Table 1.1, when we move down the curve, we transform guns into butter,
and when we move up, we transform butter into guns. Because of this reason, PPF is known
as "Transformation Curve".

Change in PPF
PPF is based on the assumption, that resources of an economy are fixed. However, in this
changing world, the productive capacity of an economy is constantly changing due to increase
or decrease in resources. Such changes in resource lead to change in PPF. The change in PPF
indicates either an increase or a decrease in the productive capacity of the economy.
The change in PPF can be of two types:
1. Shift in PPF: PPF will shift when there is change in productive capacity (resources or
technology) with respect to both the goods.
2. Rotation of PPF: PPF will rotate when there is change in productive capacity (resources
or technology) with respect to only one good.
 1ntroouctory M·icroec J
01)()
~~

1. Shift In PPF . towards right or towards

y
n,ePPfcanshift either . h ge in resources or Rightward Shift In PPF
there is c an
left, when t to both the goods. P1 -
p ·• ••,_____ PPF shifts to the ri
1
L,.,ol,,ff
(\.'UU'o O
gy with respec
h;1+ • ppf: When there 1s
•
', pp top p wh 9htfro
. htward S ,,. ,n 'vi' ', 1 1 en th "II
\ growth of resou ere Is
(i) R
•Z1)1111ctn1P1f or Upgradation ofTechnology" ·§ '\ t echnological rces or/an..
\ ' fb upgrad .'II
I d "Growth of Resources" in respect '5 \ o oth guns and b atio~
or anth th oods then PPF will shift to § '. Utter.
\

tobo eg ' . . '-' I

''
the right. for example, if there is increase '
''
in resow-res for production of butter and p P,
X
0
can produce more of both the Butter (in units)
guns,we .
goods· In such case, existing PPF (PP)~ Fig. 1.7
shift to the right, represented by Pl1 m
Fig. 1.7. -- ----
"Growth of Resources" take place when:
• Quantity of Resources increases, like: (i) Discovery of new natural resources; (ii) Inflow of Foreign
.
Capital; (iii) Increase in labour force.
• Quality of Resources increases, like: (i)"Skill Development of Human Resources" due to establish me 1
otEducattonal lnstttuteS or schemes like Pradhan Mantri KaushalVikas Yojana; (ii)'lmproved Hygl ?
------------ ------ -
Environment" due to 'Clean India Mission' (Swachh Bharat Mission).

Y Leftward Shift In PPF·

•me

(ii) Leftward Shift in PPF: PPF will shift,

towards left, when there is a techno- p
logical degradation and/ or decrease in PPF shifts to the left from pp
resources with respect to both the
P1P1• when there is decrease ~~
resources or/ and technological
goods. For example, destruction of degradation of both guns and
resources in an earthquake will reduce butter.
the productive capacity and as aresult,
PPF
•
will shift to the left from pp top p
1 1
(F1g. 1.8).
For, "How PPF will be affected by massive
unemployment~ refer HOTS. nor--:-~~..,.......l..-L-.. X
~:OPtlJllltsl
2. Rotation of PPF
It happens when there is chan • ) with respect
to only one good. The rotation gem pr?'1uctive capa~
on the Y- · can be either for the -...~ ;.K commodity

(ii ::a•
axis.

"'-
.

f•~commodity~ tire x-ms;

ease m resources rQJ: prod.....a
u1en PPF will ta
~
w:iaOlt'QI;~
ro te from AB mi~
 chap ter 1 ► Introd uction
--~-.-----:--~=--------_..,.,.. ,~,--=~:;:;c=:;;:;___:;::;:::.__ ,

.
. resou rces for prod uctio n
d tion or decre
How ever, in case of technological degr a a · AD (fig. t.9). ase J.Jl
of butte r, PPF will rotat e to the left from AB to
f ,com modi ty
y y Rota tion°
Rotation for Commodity
on the Y-axJs
on the X-axis
Rightward
A C ---;- --.!~tat· n10

~ A JI
§ D - -- -- -----
'' :5 Leftward
''
..
'' .'. rotatio n

' . .\ Rightward
'

Leftward rotation : ¥ ,,,K : rotatio n

0 D B
'
C
X -L ---- -- - ~B ~x
0
Butter (in units) Butter (in units)

Fig. 1.9 Fig. 1.10

(ii) Rota tion for comm odity on the Y-axis: A techn
ologi cal impr ovem ent or an incre ase in
resou rces for prod uctio n of comm odity on Y-axis (say, guns
), will rotat e the PPF from
AB to CB.
How ever, in case of degr adati on in techn ology or a decre ase
in resou rces for prod uctio n
of guns , PPF will rotat e to the left from AB to DB as show n
in Fig. 1.10.
Overview of PPF
Let us quick ly revis e the conc ept of PPF with the help of Fig.
1.11:
1. PPF slope s down ward s, as an incre ase in prod uctio
n of one good requ ires decr ease in
prod uctio n of the other .
y
2. PPF is conc ave shap ed due to incre asing MRT.
3. PPF show s trans form ation of one good into anoth er, E • Unatt ainab le
not phys ically , but by diver ting resou rces from one p Point
use to the other .
4. PPF show s the maxi mum avail able possibilities. The
exac t poin t of oper ation depe nds on how well the Inward ' ',,, \
resou rces of the econ omy are used . Shift '\ \
5. If the econ omy oper ates on PPF (like poin ts A, B or \ ', Outwa rd Shift
D \ ,
C), it mean s resou rces are fully & efficiently utilis ed. •
Under utilisa tion~
of resources :
I \,I\ \c
6. If the econ omy oper ates at any poin t insid e PPF 0 P2 P X
P1
(like poin t 'D'), it mean s resou rces are not fully and Comm odity - X
effic iently utilis ed.
Fig. 1.11
7. Econ omy cann ot oper ate at any poin t outsi de PPF (like
poin t 'E'), as it is unatt ainab le with
the avail able prod uctiv e capac ity.
8. An outw ard shift in PPF from PP to P P mean s, that
1 1 the econ omy can prod uce more of
both the comm oditi es, whic h was not possi ble earli er.
Solution: of rice.
The opportunity cost of producing wheat is 70 kg
Practicals on PPF
3. Calculate the ma rginal opp ort uni ty cos t (MOC) of com mo dity A for i1..
Example LJte •
giveit
combinations:
2 3 4
0 1
CommodityA 9
14 12 5
15

Solution:
1 2 3 4
GommodityA 0
14 12 9 5
Comtnoaity 6 15
1 2 3 4
MOC
ty cost fro m the fol low ing data:
Example 4. Determine the marginal opp ort uni
Commodity A CommodityB

20 10

10 14

Solution:
I

I
"
MOC 7
CommodityB _ Ll Units Sacrificed LlA
Commodity A MOC
Ll Units Gained
--
/JB
-
20 10
10
10 14 - = 2.5
4
Example S. Compute marginal opportunity cost (MOC) from the following data:
40
0

Solution:
MOC
GoodX .1 UnitsSaafllad IN
GoodY MOC= =-
/JCHtsGtJlltlt/ /JX
0 200 -
10 20 = 2
180
10
40
20 140 -=4
10
60
30 80 -=6
10

40
80 = 8
0
10

Example 6. The following table depicts the production possibilities of commodities X and Y:
Possibility
~
CommodtyY
-~.~·;~_.
...
"
A
0
B
1
C
2
D
3
E
4
10 9 7 4 0

(a) Show these production possibilities through PPF. What do the points on the curve
indicate?
(b) Label a point F inside the curve. What does this point indicate?
(c) Label a point G outside the curve. What does this point indicate?
(d) What must occur so that the economy can attain the level of production as indicated by
pointG? v
Solution:
(a) The given diagram shows all the production possibilities 10 A • G {Unattainable
given in the table. Points on the curve (A to E) indicate that Combination)
>->. 8
there is fuller utilisation of resources; ... C
(b) Point F inside the curve indicates underutilisation of ] 6
E
resources; E
8 4
(c) Point G outside the curve indicates an unattainable •F
combination; 2 {Underutilisation
of resources)
(d) Economy can attain the level of production as indicated
by point G, only when there is an increase in resources 2 3 4 5
CommodityX
· or an improvement in technology with respect to both
commodities X and Y. Fig. 1.12
 Introductory Microecono .
Illies

Example 7. A country produces two commodities: Tanks and Butter. Its production possibilities
are shown in the following table:
D E
~ A B C F
TanblitllflltsJ 20 14 9 5 2 0
'
..,.tit unllsJ 0 1 2 3 4 5
J
(a)Calculate marginal rate of transformation (MRT);
(b) Construct a PPF with the help of the various possibilities;
y
( c) Comment on the shape of PPF along with its reason.
Solution:
20
(a)
Pmslblllt¥ A B C D E F
~ 16
C:
Tanks (In units) 20 14 9 5 2 0 ::,

Butt!r(In units) 0 1 2 3 4 5
-
~
c: 12

C: 8
~
MRT - 6: 1 5: 1 4: 1 3 : 1 2: 1

(b) Fig. 1.13

'
(c) PPF is convex shaped due to decreasing MRT, i.e. less and
4

0 X
less units of Tanks are sacrificed to gain an additional unit Butter (in units)
of Butter.
Fig. 1.13
Example 8. Giving ·
reason, comment on the shape of Production '1. ti
Possib11
the following schedule: es curve based on
1r:- - - - -,~~n;itf)s:( -- - --:--,-------- -::G-oo_d_Y_______
(units)
0 I
10

9
2
3 7
---
Solution:
4
- 4
0

-
' GoodX(units)
0

1
Good Y(units)
10
---
MRT
-
I

--- - ,__ -
9 ·-
2
-

3
7
4 -- --
r------ ----- -
1Y:1X

2Y:1X
- 4
I
0 - - - 3Y:1X
- 4Y:1X-
As MRT is increasing' PP
C w,1/ be downward slo . ---- -
 Example 9. Givin g reaso n comm ent on the shape of P roduction Possib ilities Curve based
on
the follow ing sched ule:
I

Good X (Units) Good Y (Units)

I - 0
' , I

16
1 12
2 8
3 4
4 0

Solution:
Good X (units) Good Y (units) MRT i
f
0 16 -
1 12 4Y:1X
8 4Y:1X
2
4 4Y:1X
3
0 4Y:1X
4

Since MRT is consta nt, pp curve will be downw ard slopin g straigh t line.