Class :12 Micro Economics Unit-1 Chapter : 2(III) Topic : Production Possibility Curve (PPC) and Opportunity Cost.

Production Possibility Curve-PPC

Modern economists take the help of production possibility curve to solve the central problems. The production possibility curve is a curve that shows all the combinations of production of two goods that are possible to achieve with the use of given means and technology in the economy.

According to Samuelson, “Production Possibility Curve is a curve that represents all those combinations of two goods or services whose maximum production is possible in an economy under the conditions of full employment of the means by the given means and techniques.”

Assumptions of Production Possibility Curve

1- Fixed  quantity of the means of production – The amount of factors of production in an economy is fixed, but they can be used in the production of one commodity in the production of another commodity in limited quantity.

2- Full and efficient use of available resources- All the resources available in the economy are being used fully and efficiently.

3-Stable/constant technology – The technology of production remains constant. Of course, there is no change in it.

4-Two goods – In the study of production possibility curve, it is assumed for simplicity that only two goods are being produced in the economy. such as wheat or cloth or capital or consumer goods.

Interpretation of Production Possibility Curve

We can easily explain the production possibility curve with the help of production possibility schedule/table. Suppose an economy decides that it will produce only 2 items of wheat and cloth from its available resources. In such a situation, if all the means of production are devoted to the production of wheat, then 5 tonnes of wheat can be produced. On the contrary, if all the means of production are used only in the production of cloth, then we can produce 12 bales of cloth. If the economy wants to produce both these goods, it organizes its resources in such a way that it can produce maximum quantity of wheat and cloth.

As it is known from the production possibility schedule or table that if the economy chooses combination A, then in this case the production of wheat will be zero and the production of cloth will be 10 bales. Similarly, if the economy of the economy chooses A, then the production of wheat will be 5 tonnes and the production of cloth will be zero. In addition, the economy can choose combination B or coincidence C.

The production possibility schedule or table can also be represented by a graph known as the production possibility curve.

The AD curve in the diagram is a  production possibility curve or a transformation curve. The production of wheat is shown on the OX line and the production of cloth on the OY line. At point D the production of cloth is 0 and the production of wheat is 5 tonnes and at point A the production of cloth is 10 bales and the production of wheat is zero. Similarly points B and C represent different combinations of production of wheat and cloth. Point E is outside the range of production possibility curve AD. This means that the coincidence of point E cannot be achieved with the help of the present means and technology available in the economy. Similarly, if the economy produces at point F, (which is within the range of production possibility curve AD), it means that the economy is not able to use its means and technology of production efficiently.

Features of Production Possibility Curve

Properties of Production Possibility Curve (PPC)

1- The slope of the production possibility curve is downwards.

The slope of the production possibility curve is from top to bottom from left to right. The reason for this is that in the case of full employment, the production of both the goods cannot be increased simultaneously. If one commodity such as wheat is produced more, then the production of another commodity such as cloth will be reduced.

2-The production possibility curve is concave to the origin.

The reason for the original point being 14 is that for each additional unit of wheat to be produced, more units of cloth will have to be sacrificed than before. That is, the opportunity cost of producing an additional unit of wheat   shows a tendency to increase in the form of losses in the production of cloth.

3-An elevated probability curve represents more means of production.

If a new production possibility curve becomes A1D1 in an economy, it means that the means of production available in the economy have increased or the technology of production has become better so that more production is possible.

Opportunity Cost

As we know that the means of production and economic goods in an economy are limited and they have alternative uses. Therefore, when we use any resource or economic object for one use, we have to give up the opportunity to use it in other uses. For example, the production of milk in the economy is limited. If we use milk to make sweets, we will have to give up the opportunity to drink milk or use it for the baby. In economics, the concept of relinquishing the opportunity of this experiment is called opportunity cost.

According to Samuelson,  “Opportunity cost is the second best use of an economic good or resource or the value of the opportunity or opportunity that has been discarded.” We can also illustrate this with another example. In a field we can either produce wheat or we can produce cotton. If we decide to produce wheat, the cost of production of cotton will be the opportunity cost of wheat. Similarly if a decision is taken to produce cotton, the value of production of wheat will be the opportunity cost of cotton.

Marginal Opportunity Cost

The concept of marginal opportunity cost is an important concept in economics. This notion is based on two assumptions. I) The quantity of the factors of production remains constant II) The technology of production remains constant.
Marginal opportunity cost The marginal opportunity cost of one additional unit of commodity X is the reduction in the amount of production of good Y.

Marginal opportunity cost = loss of production of wheat (Y) / profit of production of cloth (X) 

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