What is the Use of Production Possibility Curve Tools in Economical Analysis?
Assuming full and efficient utilisation of the available resources and technologies, the economy can produce 0 units of good X with 100 units of good y, or 140 units of good X with 0 units of good Y, or any one of the other combinations mentioned in the table above.
Representing quantities of X on the X-axis and those of Y on the Y-axis, plotting the combinations and joining them by means of a smooth curve, we get a curve as shown in Figure 1.2.
Every time quantity of good X is increased by a given amount, the quantity of good Y, which is foregone, increases. In other words, sacrifice of Y units for the sake of an additional unit of X has a rising tendency as we go down the curve from left to right.
In the language of economics, this is known as the opportunity cost of producing an additional unit of X and is called as the ‘Marginal Opportunity Cost’, or more popularly, as the Marginal Rate of Product Transformation into X of Y, written as MRPTx,y. MRPTx,y can be expressed as a ratio of quantity of Y foregone (?y) to that of X gained (?x;). It is the numerical value of the ?y/?x.
Thus, MRPTx,y = |?y/?x|, which can also be written as –?y/?x or –dy/dx. MRPTx,y increases as we go down the PPC from left to right. We demon- strate, in Table 1.1, how MRPTx,y for the data given above, may be calculated.
Marginal Rate of Product Transformation into X of Y, thus, is
MRPT x,y= Quantity of Y foregone/ Quantity of X gained
= |dy/dx| = -dy/dx
The rate decreases, in actual terms (with the negative sign,) from – 0.10 to – 1.50 along the curve from left to right, but, in terms of numerical value, it increases from 0.10 to 1.50. Given that it is always negative, it is commonly referred to as the ‘increasing Marginal Opportunity Cost’ or as the increasing ‘Marginal Rate of Product Transformation’. Note that dy/dx represents the slope of the curve while I dy/dx I or its modulus represents the numerical value of the slope or the MRPT x, y.