production possibility boundary
Production Possibility Frontier
production possibility boundaryor
transformation curvea method of illustrating the economic problem of SCARCITY. The production possibility boundary shows the maximum amount of goods and services that can be produced by an economy at a given point in time with available resources and technology. Fig. 156 shows a production possibility boundary for motor cars and hospitals, assuming that all resources are fully employed in the most efficient way. Point A represents the maximum production of motor cars if no hospitals are produced, while point B represents the maximum production of hospitals if no motor cars are produced. At any point along the boundary, such as C, there is a trade-off between the two goods. Motor car production can be expanded only by taking resources away from the production of hospitals.
The boundary is curved rather than a straight line because not all resources are equally efficient in production of the two goods. Thus, near point A, where a large number of cars are being produced and few hospitals, large numbers of construction workers have been diverted from hospital construction to make cars, and as it is unlikely that they will be as efficient working in engineering as in construction, as we move from point C to point A the production possibility curve flattens. By contrast, near point B, where large numbers of hospitals are being built and few cars, large numbers of engineering workers have been diverted from car making to construction work, and since they are likely to be less efficient at the latter than the former, as we move from point C to point B the boundary steepens.
The point labelled U indicates UNEMPLOYMENT. More of both goods can be produced as idle resources are employed up to the limit set by the production possibility boundary. The broken line A1B1 shows how the production possibility boundary tends to move outwards over time as a result of long-term ECONOMIC GROWTH, which increases POTENTIAL OUTPUT. How far outward the boundary moves and how quickly depends upon the rate of economic growth. See OPPORTUNITY COST, LINEAR PROGRAMMING, SUPPLY-SIDE ECONOMICS, PARETO OPTIMALITY, INTERTEMPORAL SUBSTITUTION.