Class 9

Production possibilities curve (PPC)
The production possibilities curve (PPC) is a

graph that shows all of the different
combinations of output that can be produced
given current resources and technology.
Sometimes called the production possibilities
frontier (PPF), the PPC illustrates scarcity and
tradeoffs.
In economics, the production possibilities curve
is a visualization that demonstrates the most
efficient production of a pair of goods. Each
point on the curve shows how much of each
good will be produced when resources shift to
making more of one good and less of another.
For example, say an economy produces 20,000
oranges and 120,000 apples. On the chart, that's
point B. If it wants to produce more oranges, it
must produce fewer apples. On the chart, Point
C shows that if it produces 45,000 oranges, it
can only produce 85,000 apples.
Production Possibility Frontier (PPF)
 In business analysis, the production possibility frontier
(PPF) is a curve that illustrates the possible quantities
that can be produced of two products if both depend
upon the same finite resource for their manufacture.
 PPF also plays a crucial role in economics. It can be used
to demonstrate the point that any nation's economy
reaches its greatest level of efficiency when it produces
only what it is best qualified to produce and trades with
other nations for the rest of what it needs.
 The PPF is also referred to as the production possibility
curve or the transformation curve.
PRODUCTION FUNCTION
The production function relates the maximum amount
of output that can be obtained from a given number of
inputs.
In economics, a production function relates physical
output of a production process to physical inputs or
factors of production. It is a mathematical function that
relates the maximum amount of output that can be
obtained from a given number of inputs – generally
capital and labor. The production function, therefore,
describes a boundary or frontier representing the limit
of output obtainable from each feasible combination of
inputs.
Firms use the production function to determine how
much output they should produce given the price of
a good, and what combination of inputs they should
use to produce given the price of capital and labor.
When firms are deciding how much to produce they
typically find that at high levels of production, their
marginal costs begin increasing. This is also known as
diminishing returns to scale – increasing the quantity
of inputs creates a less-than-proportional increase in
the quantity of output. If it weren’t for diminishing
returns to scale, supply could expand without limits
without increasing the price of a good.
Common Example…
• One very simple example of a production function might be
Q=K+L, where Q is the quantity of output, K is the amount of
capital, and L is the amount of labor used in production. This
production function says that a firm can produce one unit of
output for every unit of capital or labor it employs. From this
production function we can see that this industry has constant
returns to scale – that is, the amount of output will increase
proportionally to any increase in the amount of inputs.
Cobb-Douglas production function
The Cobb-Douglas production function is based

on the empirical study of the American
manufacturing industry made by Paul H. Douglas
and C.W. Cobb. It is a linear homogeneous
production function of degree one which takes
into account two inputs, labour and capital, for
the entire output of the manufacturing industry.
The Cobb-Douglas production function is expressed as:
• Q = ALa Cβ
• where Q is output and L and С are inputs of labour and
capital respectively. A, a and β are positive parameters
where = a > O, β > O.
• The equation tells that output depends directly on L and
C, and that part of output which cannot be explained by
L and С is explained by A which is the ‘residual’, often
called technical change.
• The production function solved by Cobb-Douglas had
1/4 contribution of capital to the increase in
manufacturing industry and 3/4 of labour so that the C-
D production function is Q = AL3/4 C1/4
Leontief production function
Finally, the Leontief production function applies
to situations in which inputs must be used in
fixed proportions; starting from those
proportions, if usage of one input is increased
without another being increased, output will not
change. This production function is given by
Q=Min(K,L). For example, a firm with five
employees will produce five units of output as
long as it has at least five units of capital.
Iso-cost And Isoquant
An iso-cost line is a curve which shows various
combinations of inputs that cost the same total
amount . For the two production inputs labour and
capital, with fixed unit costs of the inputs, the iso-cost
curve is a straight line .
An isoquant (derived from quantity and the Greek
word iso, meaning equal), in microeconomics, is a
contour line drawn through the set of points at
which the same quantity of output is produced
while changing the quantities of two or more inputs.
Least-Cost Combination
• The problem of least-cost combination of factors refers
to a firm getting the largest volume of output from a
given cost outlay on factors when they are combined in
an optimum manner.
• In the theory of production, a producer will be in
equilibrium when, given the cost-price function, he
maximizes his profits on the basis of the least-cost
combination of factor. For this he will choose that
combination of factors which maximizes his cost of
production. This will be the optimum combination for
him.
Assumptions
The assumptions on which this analysis is based are:
1. There are two factors. Capital and labor.
2. All units of capital and labor are homogeneous.
3. The prices of factors of production are given and
constant.
4. Money outlay at any time is also given.
5. Perfect competition is prevailing in the factor market.
On the basis of given prices of factors of production and

given money outlay we draw a line A, B.
The firm cannot choose and neither combination
beyond line AB nor will it chooses any combination
below this line. AB is known as the factor price line or
cost outlay line or iso-cost line. It is an iso-cost line
because it represents various combinations of inputs
that may be purchased for the given amount of money
allotted. The slope of AB shows the price ratio of capital
and labour, i.e., By combining the isoquants and the
factor-price line, we can find out the optimum
combination of factors. Fig. illustrates this point.
In the Fig. equal product curves IQ1, IQ2 and IQ3 represent
outputs of 1,000 units, 2,000 units and 3,000 units
respectively. AB is the factor-price line. At point E the
factor-price line is tangent to iso-quant IQ2 representing
2,000 units of output. Iso-qunat IQ3 falls outside the factor-
price line AB and, therefore, cannot be chosen by the firm.
On the other hand, iso-quant IQ, will not be preferred by
the firm even though between R and S it falls with in the
factor-price line. Points R and S are not suitable because
output can be increased without increasing additional cost
by the selection of a more appropriate input combination.
Point E, therefore, is the ideal combination which
maximizes output or minimizes cost per units: it is the point
at which the firm is in equilibrium.

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Production possibilities curve (PPC)

The production possibilities curve (PPC) is a

The Cobb-Douglas production function is based

On the basis of given prices of factors of production and

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