Production Possibility Frontier
Now every individual has scarce resources at their end but
at the same time their needs and wants are unlimited. So there comes the
question of choosing how to utilize the scarce resources and put to use such
that they can consume the goods and services that they need and want on a
priority basis as not every need and want would be possible to meet. And as we
know the individuals or individual economic decision making units (which also
includes firms and business units) collectively makes up the society, so to say
even at the societal level, the economy has limited resources and they needed
to be put use in such a way to produce, distribute and consume the goods and
services which are most collectively demanded by the people collectively.
At the same time, one thing which is very important to be
noted is that the same resources can be put to use to produce different goods
and services. In simple words, from the limited resources available, different
goods and services can be produced from the same resources. So even the
resources have alternate uses. So an important decision making or the economic
problem the society has to deal with is to decide how much of each of the
scarce resources available is to be used to produce different goods or
services.
Now there can be multiple combinations of allocation of
scarce resources to produce different goods and services. So to say, each
different type of allocation of the scarce resources will result in a
particular unique mix of goods and services. For every different type of
allocation of scarce resources, there will be a particular mix of goods and
services produced. So the total amount of resources available can used to
produce different mix of goods and services.
The collection of all possible mixes of goods and services
that can be produced from a particular amount of resources is known as the
Production Possibility Set for the economy.
Let us take an illustration here.
There is an economy which is capable of producing two agricultural commodity using the resources available to it. The two agricultural commodities are Groundnut and Wheat. Assuming that the society is capable of utilizing the resources to its fullest, that is there is no wastage of resources, the following combinations of units of Groundnut and Wheat can be produced.
|
Possibilities |
Groundnut |
Wheat |
|
A |
0 |
10 |
|
B |
1 |
9 |
|
C |
2 |
7 |
|
D |
3 |
4 |
|
E |
4 |
0 |
If we assume all the resources available to the economy are
fully utilized, we see that the maximum number of units of Groundnut that can
be produced is 4 and that maximum number of units of Wheat that can be produced
is 10. And there are several combinations of different quantity of production
of groundnut and wheat if we try to allocate the available resources between
the two in several possible manners. Like with 1 unit of Groundnut we can
produce 9 units of Wheat, with 2 unit of Groundnut we can produce 7 units of
Wheat, with 3 unit of Groundnut we can produce 4 units of Wheat and so on and
so forth.
If we plot the above data on a graph, it would be as follow.
The above chart shows all the production possibility mixes of production of Groundnut and Wheat.
In the above chart, the point on the curve or other that can
be under the curve shows the different combinations of units of Groundnut and
Wheat that can be produced in the economy by utilizing the given resources.
Interpretation of the Curve
The curve denotes simply the maximum amount of Groundnut
that can be produced for a particular amount of production of Wheat or the maximum
amount of Wheat that can be produced for a particular amount of production of Groundnut.
The point on the curve as mentioned above, assumes that the resources available to the economy are utilized to its maximum. This curve is known as the Production Possibility Frontier.
So we can simple say that, the Production Possibility
Frontier denotes the combination or mix of Groundnut and Wheat that can be
produced in the economy when resources are utilized to its fullest.
Any point below the Production Possibility Frontier also
denotes a combination of production of both of the units but with few or all
amount of resources being unutilized or unemployed or wasted.
From the above chart, we can also interpret that as we shift
the resources towards a particular commodity, the production of the other gets
affected. As we can see, if the production of groundnut is increased that is to
say, the more the resources are shifted towards the production of Groundnut,
the less the production of wheat will be as there will less resources then
going towards the production of wheat and vice versa.
So in short, there will always need to be something foregone
for getting little more of other. So to say there is always a cost associated
to producing something more in terms of lesser amount of production of the
other good. This cost is known as the Opportunity Cost in economics.
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