Country Travel Economy

Transformation curve. A curve which shows for an economy as a whole how one good, X, can be ˜transformed’ into another good, Y, by reducing output of X and transferring the resources thus saved into production of Y. It is drawn on the assumption that resources in the economy are fixed in total, and so shows the alternative combinations of X and Y that are technically feasible. An example of a transformation curve is shown in the diagram.

The curve shows that if all resources are devoted to Y, a total of Y0 can be produced; if all resources are devoted to X, a total of X0 can be produced; or some intermediate combination of X and Y can be produced, such as that at a or b. It is also possible to produce a point within the transformation curve, e.g. at c, which implies that resources are not being used fully or with full efficiency, since it is possible to have more of both goods by being on the transformation curve at, e.g., b. On the other hand, it is not possible to be at a point such as d, since this is outside the transformation curve it requires more resources or greater efficiency than are in fact possessed by the economy. The shape of the curve is due to the operation of the law of diminishing returns. It represents the fact that as X is reduced from X0 by small, equal amounts, the increases in Y become smaller and smaller because the resources being released from X are encountering diminishing returns when they are moved into Y, and similarly if we reduce Y from Y0.

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