Assumptions of PPC and Different Shapes of PPC/PPF

Ø Assumptions of PPC:

The four key assumptions underlying production possibilities analysis are: 

(1) resources are used to produce one or both of only two goods, (2) the quantities of the resources do not change, (3) technology and production techniques do not change, and (4) resources are used in a technically efficient way.

Ø What happens if the production possibilities curve is a straight line?

If the production possibility frontier is straight, it means that the resources released by producing one fewer unit of peanut butter are just sufficient to allow the economy to produce the same added amount of jelly, regardless of how much of each item is currently being produced. In economic terminology, we say that the marginal rate of substitution between the two items in question is constant. That’s very unlikely to be the case if more than one input is used in the production process of either.

One implication is that if the economy is producing both peanut butter and jelly, the price of peanut butter must be three times the price of jelly. That outcome is most likely if the economy is isolated from international trade.

On the other hand, if the country is exposed to international trade, a straight-line PPF will normally imply that the country will fully specialize in the production of one good or the other: if the world price of peanut butter is more than three times the price of jelly, this country will produce only peanut butter and no jelly; and conversely if the world price of peanut butter is less than three times the price of jelly. This kind of specialization is a familiar result from the Ricardian theory of comparative advantage.