Production Possibility Curve – SS2 Economics Lesson Note (Second Term)

A production possibility curve (PPC) is a graphical or diagrammatic illustration of all possible bundles or combinations of two types of goods which a society can produce using its present level of resources and given the existing level of technology.

Behavioural objectives

By the end of the lesson, students should be able to:

• define a production possibility curve;
• read a production possibility table and the curve drawn from it;
• explain what points on, inside and outside the curve mean;
• state the law of diminishing returns and its three stages;
• define total, average and marginal utility and give the formula for average and marginal utility.

What is a production possibility curve?

The idea behind the production possibility curve is that to produce a particular commodity, the production of another commodity has to be sacrificed.

For example, take the production possibility curve for the production of cattle and motor vehicles in South Africa.

Production possibility table for the production of cattle and motor vehicles by South Africa.

The table shows the alternatives open to South Africa for substituting the production of cattle for vehicles every month, assuming a given state of technology and a given total of resources.

Production possibility curve for the production of cattle and motor vehicles in South Africa.

What does the graph show?

1. Points A to F on the graph indicate efficient use of resources.
2. At points O and P (outside the curve), production is not feasible, because resources and technology are limited.
3. At points K and L (inside the curve), production is feasible. These points represent a situation where resources are not efficiently utilised.
4. The downward slope of the PPC indicates that there is an opportunity cost of producing more of one type of commodity and less of the other, due to limited resources and technical know-how.

What is the law of diminishing returns (variable proportion)?

This law refers to a short-run production situation. The law of diminishing returns states that as more of the variable factor (e.g. labour or capital) is added to other factors which are constant (e.g. land), output will eventually increase at a decreasing rate.

The law of diminishing returns follows three stages:

1. Increasing returns
2. Constant returns
3. Decreasing returns

What are total, average and marginal utility?

1. Total utility: This is the total amount of satisfaction a consumer derives from the consumption of a particular commodity at a point in time. Consumers’ utility increases as the quantity consumed increases, but not at an equal rate, because consumers have a saturation point in the consumption of a particular commodity at a given time.

2. Average utility: This is derived by dividing total utility by the units of the commodity consumed. That is, it is the satisfaction that a consumer derives per unit of a commodity consumed.
   AU = TU/Q
3. Marginal utility: This means the additional satisfaction a consumer derives from the consumption of additional units of a particular commodity. It is the change in total utility as a result of the consumption of additional units of a commodity.
   MU = ∆TU/∆Q

What is the relationship between total product, average product and marginal product?

The relationship between total product (TP), average product (AP) and marginal product (MP) can be demonstrated by a graph. Both TP and MP initially rise. TP is at its maximum when MP is zero. TP declines after MP = 0, and MP afterwards takes negative values.

Evaluation

1. Define a production possibility curve.
2. Using the table, state how many head of cattle and how many motor vehicles South Africa produces at combination C.
3. Why is production at points O and P not feasible?
4. What does it mean when production is at points K and L?
5. State the formulas for average utility and marginal utility.

Assignment

1. State the law of diminishing returns and list its three stages.
2. Define total utility, average utility and marginal utility.
3. Explain what the downward slope of a production possibility curve shows.