The central problems of economy can be very well explained with the help of Production Possibility Curve (PPC). The PPC is an analytical tool which is used to illustrate the problem of choice. So first, we will explain the concept of PPC.
Production Possibility Curve (PPC) : A production possibility curve is a curve which shows the various alternative production possibilities which can be produced with given resources and techniques of production. We know that there is a maximum limit which can be produced with given resources and techniques of production. In this situation, if we want to increase the production of a particular commodity, then we will have to reduce the production of some other commodity. This is why, production possibility curve is also known as Transformation Curve.
In Order to Understand PPC, Let Us Assume That There are Two Types of Goods – Wheat and Mustard which are to be produced. We also assume that
- there is a given amount of productive resources and they remain fixed
- resources are neither unemployed nor underemployed and
- technology does not change. Now consider the following table:
Table 1 : Alternative Production Possibilities
|
Production
Possibilities |
Mustard
(in thousand quantals) |
Wheat
(in thousand quintals) |
Marginal Opportunity Cost |
| A |
0 |
30 |
– |
| B |
1 |
28 |
2 |
| C |
2 |
24 |
4 |
| D |
3 |
18 |
6 |
| E |
4 |
10 |
8 |
| F |
5 |
0 |
10 |
The above table shows various production possibilities between wheat and mustard. If all the given resources are employed for the production of wheat, 30 thousand quintals of wheat are produced. On the other hand, if all the resources are employed for the production of mustard, 5 thousand quintals of mustard are made. But these two are extreme production possibilities such as B, C, D and E. With production possibility B, the economy can produce with given resources one thousand quintals of mustard and 28 thousand quintals of wheat and with production possibility C, it can produce 2 thousand quintals of mustard and 24 thousand quintals of wheat. Thus, as the economy is moving from one possibility to another, it takes away some resources from wheat and put them in the production of mustard. Since resources are limited and we have assumed that they are fully employed, the economy has to give up something of one good to obtain some more of the other.
The production possibilities shown above can be illustrated diagrammatically also as is shown in the figure 1.
The curve AF is called Production Possibilities Curve (PPC) or Production Possibilities Frontier (PPF). This curve shows the various combinations of two goods which the economy can produce with a given amount of resources. Since the given resources are fully employed and utilized, the combination of two goods produce can lie anywhere on the production possibilities curve AF but not inside or outside it. For example, the combined output of two goods can neither lie at R nor at S (Figure 2). This is because at point R the economy would not be utilizing its resources fully, and at point S, the economy would not have capability to produce with the given technology.
In the context of PPC, since, there are only two goods, therefore opportunity cost of producing one good is in terms of sacrifice made of the other good. In table 1, we have found opportunity cost of producing additional units of mustard in terms of wheat. Thus, as the economy moves from possibility A to possibility B, it has to give up one thousand quintals of wheat in order to have one thousand quintals of mustard. Thus, first thousand quintals of mustard have the opportunity cost of one thousand quintal wheat to the economy. But as we step up, and move further from B to C, extra two thousand quintals of wheat have to be foregone for producing extra one thousand quintals of mustard. In other words, opportunity cost goes on increasing as we have more of mustard and less of wheat. It is this principle of increasing opportunity cost that makes the PPG concave to the origin.
If opportunity cost constant, PPC would be a straight line. But generally, we get increasing opportunity costs. This is because a given resource is suitable more for the production of wheat than mustard. As we increase the production of mustard, resources which are less productive in the production of mustard would have to be pushed in it. Thus, more units of that resource would be required to produce mustard. In other words, greater sacrifice would have to be made in terms of production of wheat for every extra production of mustard. This laws holds good if we move from A to F or from F to A on the PPC.
