Ppc Essay

The Production Possibility Curve (PPC) shows the boundaries between attainable and unattainable levels of production for two products; in this case televisions and cars. The level of production is primarily determined by the four Factors of Production (FOPs), namely, labour, capital, land and enterprise. Opportunity Cost is the cost of economic activities that are measured by the terms of its best alternative product that is foregone as a result of producing a certain good. When the best alternative is chosen from a range of alternatives, the second best choice is the opportunity cost. Often in production of goods scarcity occurs, which is a result of finite resources and unlimited wants. Some points in the graph can be attainable in the Short Run. Short run is the period of time where at least one factor of production is fixed, e.g., producing a good with fixed amount of capital, whereas other 3 factors could be altered. Other points are unattainable in the short term but can be achieved in the long run, when all factors of production are variable.
Chart 1: Production Possibility Curve for Televisions and Cars
The graph above shows the boundaries between attainable and unattainable levels of production between televisions and cars. Let us assume, right now the level of production is in point E, which shows that there is a scarcity in resources and hence the level is inefficient. Points B, C and D show maximum efficiency. Usually most PPC graphs will have the current point in production inside the PPC as maximum efficiency is difficult to achieve because there will always be diversions that will slow down the production, e.g., natural disasters, power cuts, government policies etc.
Another reason that makes most countries to remain inside a PPC line is scarcity. It is unrealistic that any country will ever have the perfect amount of resources to produce enough goods to be on the PPC line, even if the resources are not very finite, they will never be the perfect amount. For example in the graph above the point E is quite inside the PPC. There could be a scarcity of fuel that runs the machines, making the production point being inside the PPC. FOPs also have a major effect on the production. For example if the graph above showed the production of televisions and cars in Spain, the FOP which would affect the production most would be capital, as there is not enough demand in the market and this is leading to unemployment and further reduction in demand for cars and televisions. Since there is scarcity of money, people would be choosing to spend that limited money on household necessities or on health rather than on cars and televisions or would prefer to save the money for future consumption needs. This is the choice of the people, based on current circumstances – and forgoing cars and televisions is the opportunity cost. According to the Nobel Prize winning economist Milton Friedman, “there is no such thing as free lunch”, which means when there is scarcity, there is a corresponding opportunity cost. There is always ‘pros and cons’ to any decision making, both from the consumers as well as producers point of view.
Point A in the graph is unattainable in the short run due to scarcity and limitations in the FOPs; though in the long run with an increase in resources and increase in FOPs, it could be achieved. If European Union and other countries provide money to Spain, and the Spanish Government efficiently invests that money in important sectors, employment could go up, leading to more demands for goods and services and hence further increase in production. These kinds of big push can lead PPC to a higher level of attainable efficiency. Hence, scarcity of resources and choice can influence how an enterprise decides to utilise FOPs to produce a certain good or a set of goods, by weighing the implications or opportunity cost of not producing the second best alternative.