PRODUCTION POSSIBILITY BOUNDARY

Definition

• “Production Possibility Boundary (PPB) is a curve that shows the alternative combination of goods that a country can produce if all her existing resources are fully utilized”. ‘Fully utilized’ means ‘entirely used”
• “PPB is a graphical representation of an area in form of a quadrant that shows the various possible combinations of two major groups of goods which a country can produce with all her (human and material) resources.

The PPB is also referred to as:

1. Production possibility curve.
2. Production possibility Frontier.
3. Transformation curve.

 

PPB Schedule

It is a table that shows the possible combinations of two major goods which a country can produce if all her available resources are entirely and efficiently used. The table shows that all goods and services which a country wishes to produce are classified (divided) into two major groups:

1. Consumer goods.
2. Capital goods.

 

Table 1 given below shows Production Possibility Boundary schedule (table). From the table, if a country devotes all her resources to the production of only capital goods, the maximum she can produce is 100 units. Thus no single item of consumer goods can be produced. Similarly, if a country decides to produce only consumer goods, the maximum she can also produce is 100 units; and no unit of capital good can be produced.

Factually, a country rarely chooses any of the above two extremes; i.e. any of the above options. Usually, all countries apportion (divide) their resources among all important goods and services. That is, all countries produce large quantities of different items of both capital goods and consumer goods.

Combination 2 shows that the country produces 20 units of consumer goods and 80 units of capital goods. While combination 3 indicates that the country produces 40 units of consumer goods and 60 units of capital goods, etc. This implies (means) that as the country produces more of consumer goods, the amount of capital goods she can produce reduces. That is, more units of consumer goods automatically reduce amount of capital goods, and vice versa.

The graphical representation of the data in the table gave birth to the concept known as ‘Production Possibility Curve’. That is, we use the information (data) given in the table to plot (draw) the PPB shown in the figure below.

 

Note: PPB is convex from point of origin.

Figure above shows an imaginary PPB of Nigeria in 1970. All goods and services produced in Nigeria are classified into two major groups: consumer goods and capital goods. The consumer goods are measured on the horizontal (X) axis; while the capital goods are shown on the vertical (Y) axis.

The curve GBN (in thick black ink) is the (original) PPB within which Nigeria can operate in terms of possible alternative combinations of consumer goods and capital goods. At point D, Nigeria can produce ‘OL’ of consumer goods and ‘0I’ of capital goods, if all our resources are efficiently used. While point E shows that it is only ‘OJ’ of consumer goods that could be made and a larger quantity of capital goods, ‘OH’, ‘that can be manufactured.

 

Areas of importance of discussion are point located:

• Inside the curve.
• on the curve, and
• outside the curve as well as the shift of the curve either inward or outward.

 

1. Point A – located inside the curve.

2. Point B – located exactly on the curve and

3. Point C – located outside the curve.

They are clearly indicated on the diagram – figure 1.

 

1) Point “A” located inside the curve 

Point ‘A’ located inside the PPB implies (means) that the country is not able to make efficient use of all the existing resources. Thus she can only produce a lesser quantity of goods and services than she would have been able to produce if all her resources were fully utilized (used). Consequently, point A and any other point located inside the curve are termed as ‘Inefficient production combinations’.

Such production combinations signify unemployment and under-employment of resources. This implies that all the country’s productive resources (factors of production) are not fully utilized (not properly used); her firms operate at half capacity and some resources are lying idle.

 

2) Point ‘B’ located on the curve

The combination at point B is termed as an “Efficient Production Combination” because it is located exactly on the curve. Any point located on the curve implies that all the country’s available resources are efficiently and fully utilized. Thus such country is able to produce the largest quantities of the above two major goods consumer goods and capital goods. Hence it is termed as a point of efficient production combination. Such production combination implies full employment: all the productive resources are fully utilized – the country’s firms operate at fully capacity.

 

3) Point ‘C’ located outside the curve

This is viewed as impossible or unattainable production combination because the country does not have such large resources that could allow her to produce a larger combination of consumer goods and capital goods than the combination indicated on the curve, like point B. And such production combination is termed as potential or anticipated production combination.

 

Outward and inward shift of PPB

The PPB is not static; i.e. it is not in a fixed position. It is quite possible for the curve to shift either inward or outward. And both shifts are due to several reasons.

 

a) Outward shift of PPB

The outward shift of the PPB is mainly due to economic growth and development, or it is due to the following:-

1. More efficient use of resources: soil, raw material, and other capital goods.
2. Increase in stock of capital goods.
3. Improved production technique.
4. Increased productivity (a rise in output per person in an hour).
5. Increase in size of labour force, especially skilled labour.
6. Discovery and/or extraction of more minerals, like more crude oil in the oil producing states.
7. Establishment of more industries and/or a great economic boom – a very high level of economic activity.

Due to one or some of the above reasons, the original production possibility curve, GBN, shifted outward to a new position marked ‘FCM’. The outward shift of the PPB makes a combination, like point C, which was hitherto (or previously) impossible to attain (produce) becomes a possible or attainable production combination. Thus there will be a rise in the output of both capital goods and consumer goods.

 

Inward shift of PPB

It is not also impossible for the PPB to shift inward. A serious decline in economic activity will make total output to fall. This shifts the PPB inward from its original position, GBN, to HAK. The major causes of the inward shift of the PPB are as follow:-

1. Less efficient use of resources: soil, raw materials, and other capital goods, etc.
2. A decrease in the size of the labour force especially skilled labour.
3. A severe economic slump (a great fall in the level of economic activity).
4. Declined productivity (a fall in output per person in an hour).
5. A rise in the rate of unemployment and under employment.
6. Exhaustion of mineral if any were discovered.nFor instance, the exhaustion of the crude oil in Nigeria may cause a fall in her output of goods and services.

The inward shift of the PPB makes the former attainable (possible) production combination to become unattainable or impossible Combination. This has severe consequences: e.g. poverty (less income), a fall in the general standard of living, a rise in the level of import (purchase), a fall in the level of export (sale). likelihood of indebtedness (borrowing), etc. Thus much intensive effort to continuously moving (shifting) the PPB outward is of inestimable (great) value to a nation.

 

Scarcity, choice and opportunity cost in PPB

We recall that scarcity is ‘limited in supply relative to demand’. All nation’s resources are limited but their citizens have insatiable needs. That is, people’s needs are countless but the means – resources with which to produce goods and services to satisfy the numerous needs are few or limited on earth.

This limited amount of resources undoubtedly confines a nation (indeed all nations) within a specified boundary of operation in terms of the maximum quantity of goods and services she can produce in a given period if all her resources are fully utilized. If resources were not scarce there shouldn’t have been the need for the concept of “production possibility boundary”. That is, it is the scarcity of resources in all nations that had led to the idea of PPB – alternative production combinations – more of this and less of that.

Whenever we produce, more of one major group of goods – capital goods, it automatically causes a reduction in the quantity of other goods, consumer goods, that we could produce. If resources were limitless, this shouldn’t have arisen. Thus it is the limited resources that confine us within a specific production circle.

We recall that the PPB’s schedule and diagram show alternative production combinations. And none of the combination has equal amount of both goods. Thus we have to choose between the various combinations: either more of capital goods and less of consumer goods or less of capital goods and more of consumer goods. We have to choose the combination that suits our purpose. That is, from the various combinations, like E, B and D, on the curve, we have to choose the particular one from which we derive the greatest satisfaction. Thus choice is of paramount (great) importance. It is an invaluable tool in economics as a wrong choice can ruin a nation; or it greatly reduces the general standard of living of the people.

The choice of any particular combination implies the sacrifice of the others. That is, if we chose combination D instead of combination E, we have forgone ‘IH’ portion (a part) of capital goods and this has led to the popular concept of ‘opportunity cost’ sacrifice alternative.

The PPB contains many alternative combinations. The choice of one alternative implies the sacrifice of the other alternatives. The choice of combination D or moving from combination E to D makes us to have more JL consumer goods and ‘IH’ less of capital goods. That is, we gave up ‘IH’ portion of capital goods and we gained or received ‘JL’ portion of consumer goods. Thus the opportunity cost of ‘JL’ more of consumer goods is the ‘IH’ less of capital goods forgone. From the foregoing explanation, the three concepts; scarcity. choice and opportunity cost are very useful economic tools in effectively discussing transformation curve, i.e. PPB.

 

Importance of PPB

1. It enables a country to know her level of efficiency or efficient level of uses of resources. And she can raise it in order to increase national output.
2. It ensures efficient use of almost all resource.
3. It enables us to know the level of economic activities or economic performance in a given period.
4. It ensures rapid economic growth and development as it obliges a country to either operate exactly on the curved or move beyond it.
5. It inspires countries that produce inside the PPB to properly harness and efficiently use their resources that are lying idle so that they could move the curve outward and thereby increasing the national output.
6. It makes us to know whether we are efficient or inefficient in the use of our available resources.