Question

How PPC can solve central problems of an Economy & Draw PPC Showing the following situations– (a) Full and efficient utilisation of resources (b) Attainable and non-attainable combinations of output (c) Growth of resources

Answer 1

Explanation:

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Answer 2

PPC refers to "Production Possibility Curve".

Explanation:

• The PPC is a curve that shows all possible variations of two items which could be produced within an economy, with a certain amount of technology and energy . A PPC denotes "opportunity cost" & "allocative efficiency". It is also called the "Possibility of Production Frontier (PPF)".
• There are 3 central problems in an economy: "what to produce", "how to produce", & for "whom to produce". A PPC aids in solving all these problems.

The central problems of an economy can be shown with the help of PPC as follows:

(1) PPC & What to Produce

• What is to be produced is basically the problem of choice – what is to be produced for good X and good-Y? More production of  Good-X will result in lesser Good-Y production. Resources are meant to be used in their totality and efficiently and technology is expected to remain unchanged/constant.
• In figure (A) denotes where Good-X production is increased from "OR to OS", the Good-Y production should decrease from "OC to OE". Since, some resources need to  be shifted from "Y to X".

(i) PPC helps in identifying "attainable & non-attainable" combinations output. (fig B)

(ii) PPC assists in the identification of potential production levels. This corresponds to the maximum output reachable with the resources available. The usage of resources is more comprehensive and effective. The real output level can differ from the potential output level. It refers to the output level we achieve.

"Actual Level of Output ≤ Potential Level of Output" (fig C), If the resources are not used entirely and effectively, it is "below potential output level"

• "Actual Level of Output < Potential Level of Output". (fig C), If resources are not "fully & efficiently utilised"
• "Actual Output = Potential Output", if economy is operating "on the PPC" (points R & S, in the Fig. C).
• "Actual Level of Output < Potential Level of Output", if economy is operating "inside the PPC" (points F &G in the Fig. C)
• (iii) PPC aids in identifying the "opportunity cost" of shifting resources from "use-1 to use-2".  (Fig D)

If certain "resources are shifted" from "Use-1 to Use-2", the output gain of wheat=bc, whereas the output loss of apples=ab. Thus, "ab (loss) is the "opportunity cost" of bc (gain)".

(2) PPC & How to Produce

• In under-developed countries this issue is particularly severe, with difficulties in selecting the traditional (labor-intensive but less efficient) versus new (capital-intensive & more efficient) technologies. A transition from traditional to new technologies would lead to a change in PPC, but not without increasing the unemployment problem.
• In fig E is associated with the deployment  of comparatively less effective labor-intensive technology; cd is associated to more productive capital-intensive technology. If the technology shifts from labor-intensive to capital-intensive, it will represent a change from one to the other. Nevertheless, the issue of unemployment will also grow as the production level rises.

(3) PPC and for Whom to Produce:

• For whom to produce concerns problem associated with the distribution of income. Skewed (unqual) income distribution in favor of wealthy parts of society would generate additional investment surpluses (savings). PPC would then "shift to the right", although poverty would arise amongst the poorest parts of society.
• If a country relies on development without paying attention to 'balance' (equal distribution of income), it will move from ab to cd. But economic tensions will rise, leading to social unrest (fig E).

(4)  PPC and Under-utilisation of Resources:

• In underdeveloped nations  resources are under-utilised/inefficiently utilised. Any point on "AE" (such as "point P") corresponds to fuller & efficient  resources utilisation. It denotes the potential output level in the economy.
• Any point inside "AE" (such point G/F) corresponds to under-utilization/inefficient resources utilisation. It denotes that the actual output level is less than the potential output level (Fig. E).

(5) PPC and Growth of Resources

• Growth  of resources results in growth of "potential output level" (fig E). When "new resources" are explored/discovered, the economy shifts from "ab to cd", which mean a higher potential output level. However, higher level of potential output is achievable only when all resources are fully and efficiently utilised
• As new opportunities are located, the market will shift from ab to cd, which means greater potential output. Higher potential output can only be accomplished when all resources are used "fully and efficiently"