1.3 PRODUCTION LIMITATIONS

We understand that our society faces a problem of resource scarcity and needs to make choices. The concepts of scarcity and choice can be explained more clearly with the use of the production possibility curve (PPC).
In the field of economics, numerous models are used to study individual behaviour. PPC is the basic model used by economists to study the concepts of scarcity, choice and opportunity cost.
Before explaining the concept of production possibility curve, we need to make a number of assumptions to facilitate the analysis. Firstly, assume that the economy produces only two types of goods, that is, consumer goods and capital goods. Secondly, both goods can be produced using the same economic resources. Thirdly, in the short run, resource provision and level of technology remain constant. Fourthly, economic resources will be utilised fully and efficiently. Figure 1.3 shows an example of a production possibility curve.

Figure 1.3: An example of production possibilities curve

1.3.1 Production Possibility Table

A production possibility table lists the combinations of alternative outputs that can be produced with a batch of inputs. Opportunity cost can be measured from a production possibility table.
Table 1.1 shows the combination of outputs that are able to be produced by an economy.

Table 1.1: Production Possibility Table

Combination	Consumer Goods (Unit)	Capital Goods (Unit)
A	0	15
B	4	14
C	7	12
D	9	9
E	11	5
F	12	0

As shown in the table, combination A shows that resources have been fully utilised for producing capital goods only, whereas in combination F, all the resources have been utilised for producing consumer goods only. In combinations B to E, both types of goods are produced in varying quantities. For example, if combination C is chosen, 7 units of consumer goods and 12 units of capital goods will be produced. Likewise, if combination D is chosen, only 9 units of consumer goods and 9 units of capital goods will be produced.
Assuming that society is currently positioned at the point of combination B, shifting to combination C will involve opportunity cost. The opportunity cost borne by the society when it shifts from combination B (4 units of consumer goods and 14 units of capital goods) to combination C (7 units of consumer goods and 12 units of capital goods) is (12-14)/(7-4) = - 2/3, that is, to increase 1 unit of consumer goods, capital goods must be reduced as much as 2/3 units. On the other hand, movement from combination D to combination E involves opportunity cost as much as (5-9)/(11-9)= -2, that is, increase of 1 unit of consumer goods involves a reduction of 2 units of capital goods. This example explains the concept or law of increasing opportunity cost.

1.3.2 Production Possibility Curve

A production possibility curve is a diagram produced from the production possibility table. Hence, the curve can be used to explain the concept of opportunity cost. A production possibility curve shows the optimum output combination that can be produced from a batch of inputs.
The production possibility curve in Figure 1.4 is based on Table 1.1.

Figure 1.4: Production possibility curve

Production Possibility Curve (PPC) has the following characteristics:

1. PPC as a Limit or Margin This curve shows the production capacity margin of a society in utilising existing institution, resources and technology. A country may want to own more quantities of all goods available (as at point M in Figure 1.4) but is unable to achieve it by utilising the available resource and technology. Point M shows the scarcity problem faced by the particular country.
2. PPC Shows the Maximum Production that can be Achieved When All Resources are Fully and Efficiently Utilised Production can be carried out within PPC, but it shows that resources are not fully utilised or not used efficiently. For example, point T in Figure 1.4 shows inefficient resource utilisation in economy.
3. PPC with Negative Slopes or Slopes Downwards A negative gradient indicates that the production of one good needs to be reduced in order to increase the production of another good. The negative gradient shows that each choice made has its opportunity cost. We can obtain more units of one good by reducing the other good.     
4. PPC Shifts or Moves When Economic Growth Occur Economic growth may happen when there is an increase in resource quantity and quality or through technological upgrade. A shift in PPC depends on the type of resource change and the form of technological change.
   
   Assuming that technology upgrading takes place in the production of consumer goods and with the existing resource available, consumer goods can be produced twice as much compared to before. This will cause a shift at the consumer goods axis as shown in Figure 1.5.
   
   

   

   Figure 1.5: Shift in production possibility curve

   Now, assuming that there is growth in the total workforce and that the production of consumer goods is more labour-intensive compared to that of capital goods, the form of shifting that may take place in PPC is as shown in Figure 1.6.
   
   

   

   Figure 1.6: Shift in production possibilities curve

5. PPC that Convex Upwards When PPC slopes upwards, the gradient increases. The increase of gradient indicates that the law of increasing opportunity cost takes place. Increasing opportunity cost occurs when the total unit of one good that has to be foregone so as to obtain an additional unit of another good increases. In Table 1.1, shifting from combination A to combination B and combination C shows an increase of opportunity cost for the production of consumer goods, whereas shifting from combination C to combination B and to combination A indicates the increasing opportunity cost for the production of capital goods.
   
   The increase in opportunity cost is caused by the nature or characteristic of the resource that is not standardised. Some resources are more productive for a specific use compared to other forms of utilisation. In measuring opportunity cost, we cannot compare the points in the curve, such as point T in Figure 1.4 (see page 9) with the point that exists throughout the curve, because production at point T does not utilise resources efficiently, thus it cannot become the best alternative for combinations along the curve.
6. The Choice between Capital Goods and Consumer Goods is Important in Determining the Level of National Economic Growth Figure 1.7 shows that the society chooses combination B where production of consumer goods is more than that of capital goods. On the other hand, Figure 1.8 shows that the society chooses to produce more capital goods rather than consumer goods. After a certain period of time, economic growth is greater in Figure 1.8 compared to Figure 1.7 because in comparison to consumer goods, capital goods contribute more towards economic growth. Hence, production possibility curve shows that the society faces difficulty in making decisions related to the choice of producing these two types of goods.
   
   

   

   Figure 1.7: Choice of production combination

   
   

   

   Figure 1.8: Effects on the choice of production combination