Prof. Paul A. Samuelson used the concept of the production possibility curve to explain the economic problem of a society. Production Possibility Curve (PPC) is the locus (the path of a moving point) of various combinations of two commodities which can be produced with given level of resources and technology. It is also known as transformation curve. We can draw the PPC on the basis of above schedule.
On the basis of above schedule we can plot al the coordinates of A, B, C, D, E and F, which show the various combination of two goods, wheat and machines. This is shown in Fig. 1.
It appears from the PPC that any point within the enclosed area OFA, say, P, indicates that resources are underutilised. Movement from the point within the enclosed area to any point on the curve AF shows fuller utilization of resources at present.
The curve is the frontier line beyond which existing resources cannot cross. If the society is able to increase the resources due to the process of growth, new curve GH is formed. The rightward shifting of the curve (new curve) shows the growth of resources. PPC is concave to the origin. To explain the concavity of PPC we have to understand the meaning of opportunity cost and marginal opportunity cost too.
Resources are limited and these can be put to alternative uses. It is, therefore, necessary that we must make the best possible utilization of resources to maximize output. Therefore shifting of resources from present commodity to the production any alternative commodity can earn more value.
For instance, if one acre of land produces rice worth Rs. 3,000 and wheat worth Rs. 4,000, then a rational producer will forgo the production of rice for the sake of wheat. Thus, the opportunity cost (OC) of wheat will be Rs. 3,000 the cost of producing rice. Therefore, opportunity cost of a factor is also called the transfer earning of the factor or the cost for next best alternative.
According to Furguson, “The alternative or opportunity cost of producing one unit of commodity ‘x’ is the amount of commodity ‘y’ that must be sacrificed in order to use resources to produce ‘x’ rather than ‘y’- Hence, opportunity cost means opportunity lost. It includes both explicit and implicit cost.
We have discussed so far that for production of extra unit of one commodity, we have to sacrifice some units of another commodity. The rate of this sacrifice is called Marginal Opportunity Cost (MOC). In general, for increasing the production of one commodity, we will have to make a sacrifice of another commodity, In order to grab the opportunity to produce more units of another commodity, we will have to make a sacrifice of the existing commodity. The MOC of a particular good is the amount of sacrificed of the other good for per unit increase in the production of the good. This is shown in Table 2.
Table 2 is showing the marginal opportunity cost of wheat. For getting one lakh additional tons of wheat we have to sacrifice some units of machines. For instance, if we want to produce 2 lakh tons of wheat, we will have to sacrifice 2 thousand machines and so on.
Now the increasing marginal ‘opportunity cost’ implies that the PPC is concave to the origin. It depicts the economic problem, i.e., what is to be produced. Similarly, with the help of a general PPC as shown below in Fig. 2, we can show other variants of economic problems also.
Here the point ‘N’ shows OY1 amount of natural rubber (Y) and OXo amount of Paddy (X). Likewise, point ‘T’ shows OYO amount of Y and OX1 amount of X. Thus, point ‘N’ shows comparatively higher amount of y in contrast to point T. If shows that the country wants to produce more of X, it has to sacrifice the production of Y. This shows the limited availability of natural resources. Due to this reason, the country cannot choose any such combination like ‘H’ which lies beyond the PPC.
The problem of ‘what to produce and in what quantity:
This curve also reflects the problem of ‘what to produce’. If the country uses all of its resources for the production of only Y, then the maximum possible production of Y will be OPO. In that case, there will be no production of ‘X’. Similarly, if the country uses all of its resources for the production of ‘X’ then the maximum possible production of ‘X’ will be OP1O. But in that use, production of y will be zero.
Efficient Utilization of resources:
If the country chooses the combination of point M, i.e.; if it produces OXO of X and OYO of Y, then it indicates inefficient utilisation of resources. On the contrary, if the country moves on the point ‘N’ and ‘T’, i.e., on the PPC, then it shows optimum utilisation of resources or full the PPC shows underutilisation of resources.
If new resources are available or if the level of technology is improved through better method of production and better facilities, then the total PPC will shift upward or rightward. As is shown by P1P11 curve in Fig-2, here the country can produce both ‘X’ and ‘V commodities in higher units.