Production Possibilities Model

Model is the simple presentation of reality. There are four assumptions of production possibilities model.

  1. Resources are used to produce one or both of only two goods.
  2. The quantities of the resources do not change.
  3. Technology and production techniques do not change.
  4. Resources are used in a technically efficient way.

Full employment and productive efficiency-all the available resources are used to produce goods and services at least cost.

Fixed resources, available supplies of factor of production are limited both in quality and quantity.

Fixed Technology means that we are looking at economy at one point in time.

Two goods, only two goods are being produced consumer goods and capital goods. Consumer good is one that provides utility directly and capital good is one that provides utility indirectly by helping in production of goods and services.

Production possibility Model shows possible combinations of output that full employed and productively efficient economy can produce.

Economy has a choice between goods for now and goods for future.

Example of Production Possibilities Model:

Type of Product Production Alternatives
  A B C D E
Pizza 0 1 2 3 4
Robot 10 9 7 4 0

In the table A and E are unrealistic extremes and economy has to operate between B, C and C, D.

As we move from A to E, each successive unit of pizza means sacrifice of more and more robots e.g. for 1 unit of pizza means 1,2,3,4 robots respectively.

The amount of one product that is sacrificed to get a unit of another product is called opportunity cost.

Law of increasing opportunity cost is shown by production possibilities table. Increasing opportunity cost is because of lack of flexibility on part of resource.

Every successive unit of one product means more and more cost in terms of another product.

So generalization over all is “A productivity efficient and fully employed economy has to sacrifice some of one good to more of another goods limited resources prohibit it from having more of both goods.

Marginal Cost is when resources are said to be allocated efficiently to product where MB=MC of the output.

The graphical representation of production possibilities table is called frontier production that shows combination of two pairs of products.

So generalization over all is to have one product we have to give up another product if we want to have more one product we will give up more another product.

business economics

February 15, 2019