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is used in the production of two products.

The linkages between the production

possibilities curve and the product

transformation curve for the product-product

model.

Rate of product transformation represents the

slope of the product transformation function.

5.1 The Production

Possibility Curve

Production possibilities for a society:

The appearance of a production possibilities curve

differs from an isoquant. E.g. alternative outputs, not

inputs, appear on the axes.

The production possibilities curve represents the

amount of each output that can be produced given

that the available resources or inputs are taken as

fixed and given.

The production possibilities curve is usually drawn

bowed outward, or concave to the origin of the graph,

rather than convex to the origin of the graph. (See

Figure 15.1 Text book)

The classical example of a production possibilities curve

for a society has but two goods; butter and guns. Butter

represents consumer goods that a society might be able

to produce with its resources. Guns represent military

weapons. A society might choose any point on its

production possibilities curve.

Soviet Union would be near the guns axis on its

production possibilities curve.

The United States has chosen to produce some guns and

some butter, with a somewhat greater emphasis on

butter than guns. The United States would be nearer the

butter axis of its curve than would the Soviet Union.

A society such as Japan, which invests nearly everything

in goods for consumers and virtually nothing on defense,

would be found very near the butter axis of its curve.

No two societies have the exact same set of resources

available for the production of butter and guns.

Therefore, no two societies would have the same

production possibilities curve.

A production possibilities curve thus represents the possible

alternative efficient sets of outputs from a given set of

resources. A simple equation for a production possibilities

curve is

X = g(B, G)

where;

X = fixed quantity of resources available to the society

B = amount of butter that is produced

G = amount of guns that are produced

A series of production possibilities curves could be drawn

(each representing a slightly different value for the resource

bundle X).

Production possibilities curves representing smaller

resource bundles would lie inside, or interior to, production

possibilities curves representing larger resource bundles.

Like isoquants, production possibilities curves representing

different size input bundles would never touch each other.

The production possibilities curve at the firm level is called a

product transformation curve.

The resource base for the farm is a bundle of inputs that could be

used to produce either of two outputs. The farmer must choose to

allocate the available bundle of inputs between the alternative

outputs. A society faces a problem in attempting to determine how

best to allocate its resource.

Bundle between guns and butter, for it cannot rely entirely on

market signals.

The market provides these signals through the price system. The

relative prices, or price ratios, provide important information to the

farm firm with respect to how much of each output should be

produced.

The other piece of information that a farmer needs to know is the

technical coefficients that underlie the production function

transforming the input bundle into each alternative output.

Just as a family of production functions underlie an isoquant map,

so do they underlies a series of product transformation curves or

functions.

The law of diminishing returns has as much to do with the outward

bow of the product transformation curve as it did with the inward

bow of the isoquants.

Explain Table 15.1 & Figure 15.2

General Relationships:

There exists a close association between the

shape of a product transformation function

and the two underlying production functions.

Suppose that the equation for the product

transformation curve is given by

x = g(y1, y2)

where;

x = is the input bundle;

y1 and y2 = alternative outputs, such as corn

and soybeans

This is clearly not a production function, for it

tells the amount of the input bundle that

will be used as a result of varying the

quantity of y1 and y2 that are produced.

Following the procedure outlined earlier for

taking the total differential of a function,

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