So, if we choose to produce one car and two computers, we're producing less than our capacity. The production possibility curve is also called transformation curve, because when we move from one position to another, we are really transforming one good into another by shifting resources from one use to another. Putting a dollar value on these cost adds a subjective element to the evaluation. The production possibility curve or frontier is an analytical tool which is used to illustrate and explain this problem of choice. Or if I'm concerned, if I only want one rabbit, I can get more berries. On the other hand, if we move up from F towards A, we will be giving up some amount of cloth for the sake of more wheat.
It shows what can a, what is the potential combination of, in this case, goods that this nation can produce and if you're sitting on the curve, it shows that that nation, that country is efficiently using its resources. The loss of a resource or technology that affects only one of the goods is represented by the potential maximum output of that specific good decreasing with no impact on the other good. We shall explain the production possibilities with these two goods but the analysis made will equally apply to the choice between any other two goods. The cost of extra one thousand metres of cloth as we move from C to D, D to E and E to F is 3 thousand, 4 thousand and 5 thousand quintals of wheat respectively. For it to work, they must be paid enough to create the demand that shifts the curve outward. Armed with that information, business owners pick the combination that best fits the company and market demand. So this axis, I will call this my rabbit axis, rabbits.
From looking at the Table 1. We're trying to use our resources to the fullest, but we only have limited, or scarce, resources. And let's say-- so let's call this the number of rabbits you can get and then let's call this the number of berries. When a prod poss curve is a straight line, usually it is an exception, this means that as you produce more of one thing you constantly give up the same proportion of another thing as the scenario would be that the factors of production are 100% mobile. It all available resources are employed for the production of wheat, 15,000 quintals of it can be produced. At any such point, more of one good can be produced only by producing less of the other.
The curve is drawn to represent the number of goods that can be produced using limited resources and a halt in technology at each point. By doing so, it defines in the context of that production set: a point on the frontier indicates efficient use of the available inputs such as points B, D and C in the graph , a point beneath the curve such as A indicates inefficiency, and a point beyond the curve such as X indicates impossibility. As mentioned earlier, a production possibilities curve compares two different products. More specifically, it looks at different combinations of two goods that an economy can produce using certain resources and technology during a specific time frame. To review, any point outside the curve is not possible, and points inside the curve are possible but not efficient.
This is exactly a 1-to-1 tradeoff, so the slope is - 1 negative 1. And then in this axis I will do the berries. Thus, this is a situation when all available resources that are able to be used in the production of goods and services are actually being used: resources are fully employed. It is traditionally used to show the movement between committing all funds to consumption on the y-axis versus investment on the x-axis. You're doing the most you can do. Or another way to think about it, if I'm getting 200 berries I don't have enough time to get 5 rabbits.
In the two Figures 1. By having more land, more capital, more labor or more technology which we see in this middle scenario. Now all the points on the frontier-- these are efficient. Suppose your hypothetical economy, using its full productive capacity, can produce a maximum of 50 bottles of wine, 100 pizzas or some combination of the two. We suppose that the productive resources are being fully utilized and there is no change in technology.
So when you're going from Scenario A to Scenario B you're not changing the amount of time you're sleeping. This is known as specificity of resources: a given resource is more suited to the production of one good than another. So we'll call that Scenario B. And when we're talking about gathering, the only thing you can gather are some type of berries. Management uses this graph to decide the ideal ratio of units to produce to minimize cost and waste while maximizing profits.
The curve is a representation of the choices an economy makes between the two goods. Producing one additional Male-frame bike requires giving up one Female-frame bike, since they use the identical combination of material resources, tools, and labor. It depicts a society's menu of choices of these two goods. Because if we draw a line-- I just arbitrarily picked these scenarios. No, because if I were to really work properly, I could get many more berries. Again, our movement from alternative B to C involves the sacrifice of two thousand quintals of wheat for the sake of one thousand more metres of cloth. The production of wheat requires relatively larger use of land than cloth.