Why is the production possibilities curve bowed-out in shape?
The reason for the shape of the Production Possibilities Curve (PPC) is something called the law of increasing opportunity costs. Basically, what this means is that as an economy devotes more of its resources to one kind of product, it becomes less efficient. This is why the PPC is flatter at its end points and more curved in the middle.
If an economy produces two kinds of goods, it stands to reason that some of its productive resources will be more efficient at making one kind of good and some will be better at making the other. Some of them will be equally good at either. For example, imagine that our economy can make capital goods or consumer goods and services. Some people will be good at making either. But there will be some people who are only good for making consumer goods or services (let’s say they are really good at dealing with people and are good salespeople) while others will only be good at making capital goods.
As the economy makes choices in the middle of the curve (making large amounts of both) it can use everyone very efficiently. But let’s say it starts to make only capital goods. The people who are only good for dealing with people will be practically worthless. As they are employed to make capital goods, they will create less marginal product. This means that the curve will flatten out as it gets toward its endpoints.
Due to resources being scarce, an economy needs to determine which products or services can be produced. A production possibilities curve is developed to show which combination of products and services can be produced at the most efficient levels. This model assumes that only two products and/ or services can be produced at any given time. The model also assumes that the technology and quantity are held constant.
In an economy where two products (A and B) can be produced, different firms can produce A, B or a combination of both A and B. Due to the scarcity of resources, an economy producing only A would not have enough resources to produce B and vice versa, leading to varied production combinations of the two products in between the extremes.
The opportunity cost associated with producing more of B from a starting point of producing only A increases with each additional production of B, which affirms the law of increasing opportunity cost. While resource scarcity ensures that the production curve slopes downwards, it is the law of increasing opportunity cost that ensures the curve is bowed out.
The production possibility curve (PPC), also referred to as the production possibility frontier (PPF) or transformation curve, depicts the maximum output possibilities for two goods contingent upon a set of inputs (like resources and other factors) and operating under the assumption that all inputs are efficiently used.
Where the curve lies on a graph is influenced by the resources available, which is in turn impacted by technology, capital, labor, and so on.
The curve is representative of the presence of opportunity cost when having limited resources causes an organization to choose between two options.
The curve takes a bow or arc shape because of this opportunity cost; there is an increase in the opportunity cost of producing a good when more resources are dedicated to that good's production. This demonstrates that resources are not perfectly adaptable to good production and is referred to as the "law of increasing opportunity cost." The curve is downward sloping due to the scarcity of resources. One good has to be given up to produce more of a different good.