Syllabus T. Y. B. A. Paper : IV advanced economic theory with effect from academic year 2010-11 in idol

5.5 
DERIVATION 
OF 
THE 
PRODUCTION-
POSSIBILITIES FRONTIER 
 
The production-possibilities frontier or transformation curve 
shows the various combinations of commodities X and Y that the 
economy can produce by fully utilizing all of the fixed amounts of 
labour and capital with the best technology available. Since the 
production contract curve shows all points of general equilibrium of 
production, so does the production-possibilities frontier. That is, the 
production-possibilities frontier shows the maximum amount of 
either commodity that the economy can produce, given the amount 
of the other commodity that the economy is producing. For 
example, given that the economy is producing 10X, the maximum 
X
Y
LK
LK
MRTS
MRTS

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amount of commodity Y that the economy can produce is 8Y and 
vice versa. 
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4
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10
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14
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2
3
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5
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C
o
m
m
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d
it
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 Y
Commodity X
FIGURE 5.4: PRODUCTION POSSIBILITIES FRONTIER 
A 
point 
inside 
the 
production-possibilities 
frontier 
corresponds to a point off the production contract curve and 
indicates that the economy is not in general equilibrium of 
production, and it is not utilizing its inputs of labour and capital most 
efficiently. For example, point R , inside production-possibilities 
frontier TT in the figure 5.4, corresponds to point R in figure 5.3, at 
which iso-quant X1 and Y1 intersect. By simply reallocating some 
of the fixed labour and capital available between the production of 
X and Y, this economy can increase its output of Y only (and move 
from point R to point N ), or it can increase its output of both X and 
Y (the movement from point R to point M ). On the other hand, a 
point outside the PPF cannot be achieved with the available inputs 
and technology. 
Once on the PPF, the output of either commodity can be 
increase only by reducing the output of the other. For example, 
starting at point J (4X and 13Y) on the PPF in figure 5.4, the 
economy can move to point M and produce 10X only by reducing 
the amount produced of Y by 5 units (i.e. to 8Y). The amount of 
commodity Y that the economy must give up, at a particular point 
on the PPF, so as to release just enough labour and capital to 
produce one additional unit of commodity X, is called the marginal