We have seen that the production possibility curve shows the various combinations of the two goods which can be produced with the given resources. The question remains as to which of these various combinations the firm will decide to produce. Which is considered the most desirable? Surely, the firm will have to decide which combination out of the so many available will be most profitable. In order to hit on the most desirable combination, we shall introduce the price factor or the revenue factor (Price paid by the purchaser is revenue for the seller). The producer must maximize his revenue. We shall, therefore, draw the Iso-Revenue Line. All combinations on the Iso-Revenue Line yield the same revenue.
So in simple terms, Iso-Revenue Line is a line showing all possible combinations of two products that will generate a given point of total income. It depicts the rate at which the market is willing to swap one manufactured goods for another.
Applications or Uses of Production Possibility Curve
In the articles above we learned about the Iso- Revenue Line now let us move further and understand the uses of production possibility Curve. The production possibility curve can be put to a number of practical uses. Besides helping in the solution of the basic problems of production, viz., what and how, i.e., what is to be produced and how and with what combination of resources is it to be produced, the concept of the production possibility curve can be put to the following uses:
(i) The planning authority of a developing country may decide after certain stages to divert its resources from the production of necessaries to luxuries and from producer goods to consumer goods.
(ii) A democratic country may decide to devote its resources less to the production of privately manufactured goods purchased by price and more by public sector enterprises supplied free but financed by taxes such as public utilities, free education, free medical services, etc.
(iii) The production possibility curve can also help in guiding the diversion of resources from current consumption goods to capital goods like machines and increase productive resources to attain higher levels of production. Many more alternatives can be imagined.
Now that has been explained, there are other factors in the ISO – Revenue line. Add in another or two more products and see how that increases the revenue line. This will change the ISO – Revenue line as compared to the original product.
You must take into consideration that is the first product falls in revenue and the second product stays the same or possibly even rises, how does that affect the revenue line. After using these calculations, you must also consider the change in prices it takes to produce product 1 and product 2 as it relates to what a company sells each product for.