PRODUCTION POSSIBILITY CURVE

Production Possibility Curve (PPC) 
A curve which shows various possibilities of production of two goods with limited resources and technology. 
Assumptions of PPC
(a)  Resources are given. 
(b)  Given resources are fully and efficiently 
       utilised. 
(c) Technology remains constant. 
Characteristics of PPC
(1) PPC slopes downward from left to right- PPC slopes downward because with the given resources and constant technology increase in output of Good-2 is possible only when there is decreased in output of Good-1. 
(2) PPC is concave to the point of origin- PPC is concave to the point of origin because as more and more resources are shifted from Good-1 to Good-2 marginal opportunity cost tend to rise. 
Slope of PPC
Slope of PPC shows the ratio between loss of output and gain of output when some resources are shifted from use-1 to use-2. It is known as Marginal Opportunity Cost or Marginal Rate of Transformation. 
Opportunity Cost
Opportunity cost is the cost of shifting resources from one use to the other. It is equal to the loss of output in use-1 when resources are shifted from use-1 to use-2. 
Total Opportunity Cost
Total opportunity cost refers to total loss of output when resources are shifted from use-1 to use-2. 
Example- when the loss of of crop-1 is 20 tonnes, then total opportunity cost is equal to 20 tonnes. 
Marginal Opportunity Cost
Marginal opportunity cost is the ratio between loss of output and gain of output when some resources are shifted from use-1 to use-2. 

PPC and Solution to Central Problems of the economy.
(1) PPC and What to produce
What to produce means to produce which type of goods and in which quantity. 
In the above figure if production of Good-X is increased from OM to ON the production of Good-Y reduces from OC to OR. Because some resources must be shifted from Y to X. 
(2)  PPC and How to produce
How to produce means to produce goods and services in the economy by using which technique of production. There are two techniques of production 
(a) Capital intensive technique
(b) Labour intensive technique
From the above figure it is clear that if the economy produces goods by using capital intensive technique PPC will shift towards right from AB to CD. But if the economy produces goods by using labour intensive technique. PPC will shift towards left from CD to AB. 
(3) PPC and For whom to produce
For whom to produce means to produce goods and services in the economy for which section of the society.  There are two sections of the society
(a) Rich
(b) The poor

From the above figure it is clear that if the economy produces goods for rich people, PPC will shift towards right from AB to CD. But if the economy produces goods for the poor, PPC will shift towards left from CD to AB. 
(4) PPC and Underutilisation of resources
When the resources are not utilised up to their optimum level is known as underutilisation of resources.
From the above figure it is clear that in case of underutilisation of resources, when some resources remain unused PPC will shift towards left from CD to AB. 
(5) PPC and Growth of resources
Growth of resources means increase in resources which is possible only when new resources are discovered and technology improves. 
From the above figure it is clear that in case of growth of resources PPC will shift towards right from AB to CD. 

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