Production Possibility Curce

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  • Topic: Economics, Opportunity cost, Production-possibility frontier
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  • Published : February 7, 2013
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Production Possibilities Curve (PPC)

The Production Possibilities Curve (PPC) is used to show the economic concepts of scarcity, choices and opportunity cost. The PPC is a graphical representation showing maximum combinations of output (goods and services), a nation can produce with limited economic resources in a fixed period time.

Assumptions of the production possibilities curve:
I. Only 2 goods will be illustrated
II. The amount of resources is fixed
III. State of technology is constant
Example: Country X produces 2 goods – cars and airplanes. The PPC can be explained by use of a graph or table: Production Possibilities| Car| Airplane|
A| 0| 10|
B| 1| 9|
C| 2| 7|
D| 3| 4|
E| 4| 0|
Table 1. Various combinations

Figure 1. Production Possibilities Curve

In this case, points A, B, C, D, E is PPC of country X. Points A to E shows different combinations of the maximum output of 2 goods which may be made in full employment and the use of all available resources in the economy. If all the factors of production are used in the production of cars only, country X can produce 10,000,000 units of car. However, if all factors are used in the production of airplanes, then, 4,000 units of airplanes can be produced. There are also other combinations that show different possibilities. For example, Point C shows producing 3,000 units of airplanes and 4,000,000 units of car.

* Attainable combinations BUT represent combinations which do not fully or efficiently employ resources (e.g. point F). * Involve unemployment or underemployment of resources.
When the nation is operating inside the current production possibilities curve—for example, at point F — it is a result of unemployed resources from less than maximum efficiency in the use of resources in a full-employment economy. At point F, only 4,000,000 units of cars and 2,000 units of airplanes are produced. Given the available resources, country X can produce 6,000,000 units of cars and 2,000 units of airplanes.

Points outside the PPC
* Shows the main basic economic concept: Scarcity.
* Represent unattainable combinations, given current fixed resources and technology. (e.g. point Z) * Possible only with new sources of economic growth.
Scarcity means that people want more than is available. Scarcity limits us both as individuals and as a society. As individuals, limited income (and time and ability) keep us from doing and having all that we might like. As a society, limited resources (such as manpower, machinery, and natural resources) fix a maximum on the amount of goods and services that can be produced. In economics, scarcity forces people to make choices, as everyone cannot have everything. For example, at point Z, country X wants to produce 10,000,000 units of cars and 4,000 units of airplanes, but due to limited resources and a limited state of tecnology, this cannot be achieved. Without scarcity, an economy cannot exist.

The market’s fear of scarcity must be replaced with the abundance of the loving God. And the first commandment of the Market: “There is never enough,” must be replaced by the dictum of God’s economy: namely, there is enough, if we share it (Jim Wallis, Sojourners)

Points along the PPC (such as points A, B, C, D and E)
* Represent the second concept: Choices.
* Scarcity requires choice.
Because of scarcity, choices have to be made on a daily basis by all consumers, firms and governments. For a moment, just have a think about the hundreds of millions of decisions that are made by individuals, firms and government in your own country every single day. Everyone cannot have what he or she wants, so they have to choose from the available alternatives.

Country X will have to make its choices from various possible combinations of cars and airplanes, which will be better for the nation. Any point along the PPC are both...
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