Question

Case-3

Oman is a rural, agricultural country, and fishing and overseas trading are important to the coastal populations. Oil in commercial quantities was discovered in Oman in 1964 and was first exported in 1967. Subsequently the production and export of petroleum rapidly came to dominate the country’s economy. Oil revenues represent roughly two-fifths of gross domestic product (GDP) and about three-fourths of the government’s income. Goverment of Oman under the leadership of His Majesty utilises the resources of the country to bring maximum development for the nations. The resources are allocated based on a plan approved by the ministry. The Production Possibilities Curve (PPC) is a model widely used in economics to explain various economic problems and theories especially the trade-offs associated with allocating resources between the productions of two goods. The PPC can be used to illustrate the opportunity cost, efficiency, inefficiency, economic growth, and contractions. This concept is also helpful to explain the central problems of what, how and for whom to produce.

Questions: [ Student has to write answer at least 125 words for each sub-question]

i) Explain how the concept of PPC is helpful for Oman in the allocation of resources.

  

ii) Explain how the concept of PPC is useful to solve the problem of ‘what to produced” in an economy.

iii) Suppose Oman wants to increase the production of a particular product. How the concept of opportunity cost is useful in taking such a decision. Explain.

iv) How the concept of PPC is useful in explaining the problem of scarcity of resources?

Answer 1

(i) :-

Production possibility curve is a curve that helps to represent what goods can be produced when a country has a given amount of resources and Technology. Production of any goods requires inputs such as capital , machinery, Labour , technology etc. Let us consider that Oman has two options for goods that can be produced using a given amount of resources and Technology. The two goods can be assumed as oil and agricultural and fishery products. Both the products can be exported to other countries and creates revenue to the government .Extraction of oil from the oil mines require extensive lalabour requirement which is an essential element for fishing and agricultural activities. Thus when the the number of labour is fixed ,the production possibility curve helps to determine various combinations of oil and Agricultural Products that can be produced. It represents that increasing the production of one good will lead to decrease in production of another good.

(ii)-

The producer faces a central problem of choice between production of commodities due to limited resources with the society that can be illustrated with the help of production possibility curve. Production possibility curve shows the choice that can be made when increasing the production of one good leads to substitution for the production of another good . This means that when one chooses to increase the production of one good it has to to reduce the production of another commodity .This helps the producer to measure the opportunity cost of one in relation to the other good and compare it with the revenue generation in order to decide what production level will lead to the most optimum level of profit. This implies that any production on such point Or combination will maximize the profit for the producers. Thus it can be concluded that production possibility curve is a very essential tool for the producer in order to decide what are the optimum quantities of goods that are to be produced in order to maximize their profit and utilise the given resources in the most optimum level.

(iii) -

Opportunity cost is a cost incurred by not choosing one alternative in comparison to the other. This helps to form nexus between scarcity and choice. The scarcity implies the Limited number of resources available with the society that are used as inputs in the production of certain commodities. While the choice implies the various combinations that represents different level of output of two commodities that are produced using given resources and Technology .The opportunity cost helps the producer to decide how many units of another good has to be foregone in order to increase the production of one commodity. Thus if the opportunity cost is very high which means that a large number of units are to be sacrificed in order to support the production of another commodity while lower opportunity cost means fewer units of goods are required to be sacrificed in order to increase the production of a certain commodity. The opportunity cost is compared with the revenue generation due to change in the production and this helps the producer to decide whether the extra revenue generation is higher than the forgone opportunity cost or not. If the opportunity cost of producing new goods is higher than the extra revenue that is being generated due to increase in the production then the producers chooses not to to produce the commodity and vice versa.

(iv):

The PPC curve represents the various combinations of two commodities that can be produced using a given resources and Technology. The x axis of PPC curve represent production of one good while the y-axis of the PPC curve represents the production of another good .Various levels of output that can be produced using given amount of inputs are marked on the graph and the line that joins these points is called the PPC curve. Usually the PPC curve is concave to the origin which represents as more and more goods are produced the opportunity cost also increases. Now Generally inputs like capital and labour are scarce and limited .This means if the the labour is used in producing a certain commodity then definitely the production of another commodity will reduce due to scarcity of labour. Similarly if the capital is used to purchase machinery for production of one good, then purchase of machinery and raw materials for another commodity will automatically reduce leading to production of fewer units. Thus the PPC curve represents that due to Limited amount of resources available with the society, increase in production of one commodity will automatically lead to decrease in production of another commodity.