![]() It describes all the possible combinations of any two commodities that can be produced by an economic system by using all resources with maximum possible efficiency. The focus of all such, points is the production possibilities curve (PPC) of society. The different combinations of food and clothing are shown by points like a, b, c, d, e and f in Fig. The information contained in Table 1 can be represented graphically, as in Fig. All other possibilities are also summarised in Table 1. Likewise, if all resources are used to produce only clothing maximum output will be 50 units (measured in yards). The following table shows the possible combinations of the two commodities a society is capable of producing when all its resources are fully and most efficiently employed.įrom Table 1 we see that when all the resources are used to produce only one commodity, say food, the maximum output is 35 units (measured in quintals). It is possible for a society to produce alternative combinations of these two commodities by using all its resources (with existing technology). The vertical axis measures food output and the horizontal axis output of clothing. 3 we show a hypothetical economy which is using all its resources to produce only two commodities, say, food and clothing abbreviated as/and c. The concept of opportunity cost can well be represented graphically. By drawing the PPCs of the two countries, we can study their pattern of cooperative advantage. Otherwise gainful trade between them is not possible. This means that the PPCs of the two countries should differ in shape and slope. The final point to note here is that, trade between two countries is possible only when their opportunity cost ratios with respect to the production of any two commodities differ. (b) Technological progress which increases the productivity of existing resources. ![]() When the additional production of some defence goods such as guns or the additional quantity of some actives being considered, marginal (additional) opportunity cost come into play. This is known as decision making at the margin. We all trade-off one activity for another until the marginal opportunity cost of an additional amount of the first activity equals the marginal benefits of that additional amount. Individuals also behave in the same way - by making marginal calculations. Society finally stops at a point where it believes that the next move would cost more than the benefits it would receive. Thus, it produces more of clothing by reducing the production of food.Īt each point society is faced with a question: Do we want to produce at this point or move on to the next point, even though moving on will mean giving up additional units of one commodity? Each move means that society believes that the additional benefits it will derive will exceed the marginal opportunity cost it will incur. No doubt, PPC shows society’s menu of choice but the question is: How does the society choose at which level on PPC to produce? In effect, society begins at an extreme point under vertical axes and produces only one commodity then it gradually moves point by point along the PPC towards the horizontal axes. If opportunity cost remains constant when resources are transferred from one use to another the PPC will be straight-lined with constant slope. This is why the PPC is usually concave to the origin showing increasing slope. In other words, opportunity cost increases. Since resources tend to be specialised, if they are diverted from one use to another their marginal contribution falls. Specialisation:Īs society produces more and more of one type of good, it has to sacrifice or give up a constant, an increasing or a decreasing amount of other types of goods depending on whether marginal opportunity costs are constant, increasing or decreasing. This is the essence of the opportunity cost principle. A full employment economy must always give up some units of one commodity to get more of the other. The slope of the PPC measures opportunity cost ratios or transformation cost ratios. To produce certain amount of one good means giving up certain amount of other goods. In fact, the only ways to produce more of all goods and services are to increase the quantity of resources and to use resources more efficiently. So, more of one commodity can be produced by reducing the production of another commodity. However, resources have alternative uses. Since resources are scarce, only limited quantities of goods and services can be produced. ![]() The following points highlight the seven applications of Production Possibility Curve (PPC).
0 Comments
Leave a Reply. |