1. The problem of choice between relatively scarce commodities due to limited productive resources with the society can be illustrated with the help of a geometric device, is known as production possibility curve.
Production possibility curve shows the menu of choice along which a society can choose to substitute one good for another, assuming a given state of technology and given total resources.
2. The explanation and analysis of production possibility curve are based upon certain assumptions, some of them are the following:
- The time period does not change. It remains the same throughout the curve.
- Techniques of production are fixed.
- There is full employment in the economy.
- Only two goods can be produced from the given resources.
- Resources of production are fully mobile.
- The factors of production are given in quantity and quality.
- The low of diminishing returns operates in production.
3. Every production possibility curve is based upon these assumptions. If some of these assumptions change or neglected, then it affects the nature of the production possibility curve.
4. To draw this curve we take the help of the production possibilities schedule, as shown below.
5. The schedule suggests that if all resources are thrown into the production of food, a maximum of 500 tons of food can be produced, given the existing technology.
If on the other hand, all resources are instead used for producing cars, 25 cars can be produced. In between these two extreme possibilities exist. If we are willing to give up some food, we can have some cars.
6. We can obtain a production possibility curve by drawing production possibilities schedule graphically. The quantity of food is shown on the x-axis and the number of cars is shown on the y-axis, the different six production possibilities are being shown as point P1 P2 P3 P4 P5 & P6
Problems of the economy
1. The problem of choice:
The problem of choice arise because of the given limited resources and unlimited wants, which may relate to the allocation of resources between the goods for the higher income group and the lower-income group and the goods for the defense and the civilians. Since PPC is the locus of the combination of the goods the problem of choice will not arise when we choose any point on PPC.
2. Solution of central problems:
The central problems of an economy can be explained with the help of PPC. The solution of problem of what to produce involves the decision regarding the choice of location on the production possibility carves.
A production combination represented by any point inside the PPC indicates that the economy is using inefficient methods of production and inefficient combination of resources.
