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Why does production possibility curve slope concave downwards?

Why does production possibility curve slope concave downwards?

Solution

The production possibility curve is concave to the origin because of the increasing marginal rate of transformation (MRT).

  1. Increasing MRT: to produce each additional unit of one good (X), larger and larger amounts of the other good (Y) must be sacrificed, so the slope steepens as we move down the curve.
  2. Resources are not equally efficient: resources are not equally suited to producing both goods, so as they are shifted from Y to X the extra gain in X falls while the sacrifice of Y rises — bowing the curve outward from the origin.

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