Problem of Choice & Production Possibility Curve

The basic economic problem is that human wants are unlimited while the wherewithal, means, or resources for fulfilling those wants are limited. Thus every society must face three problems: What to Produce, How and For Whom, which are known as the problems of Allocation, Choice of Techniques and Distribution. It is this choice problem that Lionel Robbins emphasized in his definition.

Economics studies this choice problem. One of the ways in which it does so is through the Production Possibility Curve or Frontier.

Production Possibility Curve (PPC)

This is a geometrical or graphical way of depicting this choice problem. It depicts the production possibilities or “menu”, as Paul Samuelson had put it.

Let us say that a society or economy, using all its resources fully, has the option of producing any combination out of a maximum of, say, cereals (represented by the symbol X), and a maximum of automobiles (Y).

Let us represent cereals (X) on the horizontal axis and automobiles (Y) on the vertical. Each point on the X-Y plane would then represent a numerical combination of cereals and automobiles.

Let us have a table of alternative combinations of the maximum number of laptops (Y) that can be produced along with a certain amount of cereals(represented by X) or vice versa. That is, we have a table of alternative combinations of maximum Y’s going with different X’s (or combinations of maximum X’s going with different Y’s). Each such combination can be represented as a point on the X-Y plane. Let us join them.

What we get is to get the Production Possibility Curve (PPC), also called Production Possibility Frontier.

Each point on the PPC (such as A, B, C)represents a maximum of X (at a certain Y) or a maximum of Y (at a certain X). All points below and including the PPC represents combinations of X and Y that are Attainable by the society concerned, but only points on the PPC represent points of maximum X (given the Y’s) or maximum Y (given the X’s). Points below the PPC (including the two axes and so, the origin) represent what the society concerned can produce but without using its (scarce) resources fully.

Point A (on the vertical axis and topmost left on the PPC) shows the maximum number of laptops that the country in question can produce if it produces no cereal at all!

Point B (South-East of A. lower down rightwards on the PPC) shows that the country can produce. That is, there is a trade-off or choice between the production of the two commodities.

Point C (South-East of B, further rightwards down on the PPC) shows a further trade-off. If less laptop are produced, the country’s resources can produce more cereals. This would be better from the point of view of food consumption, but computer use would suffer. What should the policy-makers choose?

Point D (South-East of C) shows a further trade-off.

Point E (further South-East and the extreme right point on the PPC, on the abscissa, with zero ordinate) shows the maximum amount of cereals the country can produce if it decides to produce no laptops at all. Will that be the appropriate policy?

The PPC thus depicts an entire array of possible choices or trade-offs for the economy.

Now, when we opt for one choice, we give up another. We forego an opportunity. The cost of opting for one choice is thus the opportunity of opting for the other. In Economics, this is given the name of Opportunity Cost.

If the country moves down from point A to B, the number of laptops it does NOT produce is the Opportunity Cost of the number of kgs of cereals that it does produce. Again if the country moves from B to C, the further number of laptops that it does not produce is the Opportunity Cost of the additional number of kgs of cereals that it does produce.

The slope or gradient of the PPC reflects the Opportunity Cost.

Usually, the PPC is bowed outwards or concave. If the slopes of points A, B, and C, D are measured by tangents drawn to the PPC at those points, the tangents will be seen to get steeper and steeper.

This happens because when the country moves from A to B, from the maximum number of laptops and no cereals to fewer laptops but some cereals at least, some of the resources (say, workers) that were being used for making laptops are moved to the production of cereals. Those computer workers who are first disposed off were probably not too efficient in the first place. So their reduction does not make too much of a dent; the slope of the PPC (as measured by the tangent at, say, B) is relatively flat.

When the country moves from B to C, let us say computer workers who are relatively more efficient than the first lot disposed of are now put to the production of cereals. Per additional units of cereal production, the reduction in laptop production is more. The slope of the PPC at C is higher than at B. The slopes get higher as we move further down the PPC, which thus has a bowed shape.

If, for some reason or the other, the economy becomes capable of producing more of X (at every given Y) or more of Y (at every given X), there is a forward shift of the PPC, reflecting Economic Growth. If the reverse happens, there is a backward shift of the PPC.

Even if the economy becomes capable of producing more of X (at any given Y other than at the corner point of maximum Y) or more of Y (at any X other than the corner point of maximum X), there occurs a forward shift of the PPC, reflecting Economic Growth. If the reverse happens, there is a backward shift of the PPC.

This is how the PPC helps the study of human choice among alternative uses of scarce resources.

Read More- Microeconomics

1. Microeconomics: Definition, Meaning and Scope
2. Methods of Analysis in Economics
3. Problem of Choice & Production Possibility Curve
4. Concept of Market & Market Mechanism in Economics
5. Concept of Demand and Supply in Economics
6. Concept of Equilibrium & Dis-equilibrium in Economics
7. Cardinal Utility Theory: Concept, Assumptions, Equilibrium & Drawbacks
8. Ordinal Utility Theory: Meaning & Assumptions
9. Indifference Curve: Concept, Properties & Shapes
10. Budget Line: Concept & Explanation
11. Consumer Equilibrium: Ordinal Approach, Income & Price Consumption Curve
12. Applications of Indifference Curve
13. Measuring Effects of Income & Excise Taxes and Income & Excise Subsidies
14. Normal Goods: Income & Substitution Effects
15. Inferior Goods: Income & Substitution Effects
16. Giffen Paradox or Giffen Goods: Income & Substitution Effects
17. Concept of Elasticity: Demand & Supply
18. Demand Elasticity: Price Elasticity, Income Elasticity & Cross Elasticity
19. Determinants of Price Elasticity of Demand
20. Measuring Price Elasticity of Demand
21. Price Elasticity of Supply and Its Determinants
22. Revealed Preference Theory of Samuelson: Concept, Assumptions & Explanation
23. Hicks’s Revision of Demand Theory
24. Choice Involving Risk and Uncertainty
25. Inter Temporal Choice: Budget Constraint & Consumer Preferences
26. Theories in Demand Analysis
27. Elementary Theory of Price Determination: Demand, Supply & Equilibrium Price
28. Cobweb Model: Concept, Theorem and Lagged Adjustments in Interrelated Markets
29. Production Function: Concept, Assumptions & Law of Diminishing Return
30. Isoquant: Assumptions and Properties
31. Isoquant Map and Economic Region of Production
32. Elasticity of Technical Substitution
33. Law of Returns to Scale
34. Production Function and Returns to Scale
35. Euler’s Theorem and Product Exhaustion Theorem
36. Technical Progress (Production Function)
37. Multi-Product Firm and Production Possibility Curve
38. Concept of Production Function
39. Cobb Douglas Production Function
40. CES Production Function
41. VES Production Function
42. Translog Production Function
43. Concepts of Costs: Private, Social, Explicit, Implicit and Opportunity
44. Traditional Theory of Costs: Short Run
45. Traditional Theory of Costs: Long Run
46. Modern Theory Of Cost: Short-run and Long-run
47. Modern Theory Of Cost: Short Run
48. Modern Theory Of Cost: Long Run
49. Empirical Evidences on the Shape of Cost Curves
50. Derivation of Short-Run Average and Marginal Cost Curves From Total Cost Curves
51. Cost Curves In The Long-Run: LRAC and LRMC
52. Economies of Scope
53. The Learning Curve
54. Perfect Competition: Meaning and Assumptions
55. Perfect Competition: Pricing and Output Decisions
56. Perfect Competition: Demand Curve
57. Perfect Competition Equilibrium: Short Run and Long Run
58. Monopoly: Meaning, Characteristics and Equilibrium (Short-run & Long-run)
59. Multi-Plant Monopoly
60. Deadweight Loss in Monopoly
61. Welfare Aspects of Monopoly
62. Price Discrimination under Monopoly: Types, Degree and Equilibrium
63. Monopolistic Competition: Concept, Characteristics and Criticism
64. Excess Capacity: Concept and Explanation
65. Difference Between Perfect Competition and Monopolistic Competition
66. Oligopoly Market: Concept, Types and Characteristics
67. Difference Between Oligopoly Market and Monopolistic Market
68. Oligopoly: Collusive Models- Cartel & Price Leadership
69. Oligopoly: Non-Collusive Models- Cournot, Stackelberg, Bertrand, Sweezy or Kinked Demand Curve
70. Monopsony Market Structure
71. Bilateral Monopoly Market Structure
72. Workable Competition in Market: Meaning and Explanation
73. Baumol’s Sales Revenue Maximization Model
74. Williamson’s Model of Managerial Discretion
75. Robin Marris Model of Managerial Enterprise
76. Hall and Hitch Full Cost Pricing Theory
77. Andrew’s Full Cost Pricing Theory
78. Bain’s Model of Limit Pricing
79. Sylos Labini’s Model of Limit Pricing
80. Behavioural Theory of Cyert and March
81. Game Theory: Concept, Application, and Example
82. Prisoner’s Dilemma: Concept and Example