Question

Discuss how does a PPC (Production possibility curve) explain the concepts of tradeoffs (opportunity cost), attainable and unattainable output combinations, and efficiency. What kinds of decisions would make a PPF expand over time? What kinds of decisions would make it contract over time?

Answer 1

PPC : with reference to opportunity cost, , attainable, unattainable and efficient output including expansion and contraction of PPC.

Production possibility curve (PPC) : PPC shows various possible combinations of two goods and services that an economy could produce within given resources.

PPC and opportunity cost: opportunity cost is the forgone when we choose the production of one good over the other. It shows how much of one good must be given up inorder to produce more of the other good.

When move along the points of PPC , we find that we must give up some amount of one good inorder to produce more of the other good . Suppose a economy produces Beds and chairs . ( Please refer to attached image for the graph) . At point A , we are producing 110 units of bed and 20 units of chair. Moving to point B , we are increasing the production of chair by 10 units , for this we are giving up 20 units of bed i e. We are producing 90 beds and 20 chairs. At point C, we are producing, 60 units of bed and 30 units of chair i.e. for producing 10 more chairs we gave up 30 beds . At point D, we are producing 20 beds and 40 chairs i e. we gave up 40 beds to produce 10 more chairs. Now looking at opportunity cost of producing extra chairs:

Point A: 10 beds

Point B : 30 beds

Point C: 40 beds

This is how PPC shows increasing opportunity cost.

Attainable combinations : the combination that can be produced within given resources is called attainable combinations. The combinations which lie on PPC are attainable (efficient) and those lying below PPC are also attainable (inefficienct) . Point A B C and F in the figure are attainable combinations.

unattainable output combination: the combination of goods and services which can't be produced due to lack of resources is called unattainable combination output. Unattainable output combination lies above PPC showing that due to limited resources we can't reach that point of production. Point G shows unattainable combination of output.

Efficiency: when resources are fully utilised for the production of goods and services is called efficiency. All the points lying on PPC shows efficient output combination.

Expansion of PPC: when PPC move towards right it is called expansion of PPC. Expansion means that due to increased resources, we are able to expand our output. Expansion is caused when a new efficient technology is introduced, education and training of employees are improved, no. of labour increased, amount of capital and land applied increases, better enternprenurial services introduced .

Contraction of PPC: when PPC moves towards left it is contraction of PPC. Contraction of PPC meabs that our production has reduced . Any change leading towards low production causes contraction in PPC suc as decrease in land , labour, capital. Use of inefficient technology, natural calamities, under utilisation of resources etc.

( Please refer to the attached image for graphical representation)