The bowed shape of the Production possibilities curve illustrates _________?

A. that production is inefficient
B. that demand is relatively inelastic
C. that production is unattainable
D. the law of increasing marginal cost

Correct Answer:

Option A = that production is inefficient

Explanation

Production possibility curve (PPC) shows the possible combination of different commodities that can be produced in a given economy given the prevailing level of technology, if all the available productive resources are efficiently utilised.

The reason for the shape of the 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 because, not all resources are equally suitable for all the industries. If resources are transferred from good A to B, initially the resources to be transferred will be those which could be the least efficient for A. Later, as more of good B needs to be produced, the resources that may be very efficient for good B and not so efficient for good B may also be transferred. In this situation, the economy loses on both sides. That means, the economy is usually inefficient on both ends of the PPC curve while it is the most efficient when resources are appropriately allocated for both goods according to their suitability which make the PPC to be curved. This is why the PPC is flatter at its end point and more curved in the middle.