Lecture 2: Production Possibility Curve (PPC)

Definition

Production Possibility curve shows maximum attainable output that an economy can produce by its avail-
able inputs and technology.

Y
PPC
A
C
R1 F
Rice
G
R2 D

B
O
Q1 Q2 Wheat

Figure: Production Possibility Curve (PPC)

The figure shows that AB is the production possibility curve and an economy can produce at any point of
this curve for efficient production, for example C point or D point. It cannot produce at point F because
the economy has limited resources and it is unattainable whereas it also cannot produce at point G be-
cause it is inefficient production point.

Opportunity Cost

Opportunity cost of something what we must sacrifice to get it. For example: At the night before exam, a
student decides to spend 3 hours for watching a movie with a ticket of 500 taka in spite of reading book.
Here the opportunity cost of reading book is the time spent in watching movie and the taka that can be
used another purpose.

The concept of opportunity cost is explained below with the help of figure.
 Y
PPC
A
C
R1
Rice Loss

R2 D

Gain

B
O
Q1 Q2 Wheat
Figure: Opportunity cost with PPC

The above figure shows the concept of opportunity cost with the help of production possibility curve.
Here, OX axis shows the quantity of Wheat production and OY axis shows the quantity of Rice produc-
tion. If an economy wants to produce only rice then it can produce OA amount of rice and zero quantity
of wheat. Similarly, if it wants to produce only Wheat by its all inputs and available technology, then it
can produce OB amount of wheat. Here the opportunity cost of OA quantity of wheat is OB quantity of
rice and vice versa.

Now suppose the economy wants to produce at point C, then at point C it will produce OR1 quantity of
Rice and OQ1 quantity of wheat but suppose the economy wants to produce more wheat. In this case it
will produce at point D. At point D, the economy produces OR2 quantity of rice and OQ2 quantity of
wheat. So here the rice production reduces from OR1 to OR2 and wheat production increases from OQ1 to
OQ2. So the opportunity cost for Q1Q2 amount of wheat is R1R2 quantity of rice.

Assignment 1:

1. Define inflation. What the types, causes and effect of inflation.

2. Is inflation good or bad for an economy? Give your opinion.

 Lecture 3: Economic Problems and Law of Diminishing Marginal Utility

Economic Problems:
There are mainly three economic problems existed in every society. They are:
i) What to produce?
ii) How to produce?
iii) For whom to produce?

Scarcity and Choice

Scarcity refers to the limited supply of resources compared to its demand. For this reason the economists
have to choose the goods and services according to its importance. This is why economics is also called a
science of decision making.

How these three economic problems can be solved?

Product Market
Demand for goods & service

Supply of goods & service

Payment for goods & ser-

Income from
supply of goods &
vice

service

Business Firm
Households
Demand for inputs

Payment for inputs

Supply of inputs

Income from
supply of
inputs

Factor market

Figure: The Market System Relies on Supply and Demand to Solve the Trio of Economic Problems

The figure shows how market mechanism solves the three basic problems of economics. In the figure
there are two markets and two agents. Households sell factors of production to the business firm in the
factor market. For this they get payments from business firm. Households also spend this income in the
product market for buying goods and service in the product market. On the contrary, Business firm sell
products in the products marker for which they get payment and they spent this income for buying inputs
in the factor market.
It is simply the total picture of the intricate web of supplies and demands connected through a market me-
chanism to solve the economic problems of what, how, and for whom.

Reference Books

1. P. A Samuelson & W D Nordhaus: Economics 17th edition

2. N.G. Mankiw 3rd edition, Principles of Economics 2000
3. Pindyck, R. S., & Rubinfeld, D. L. (2014). Microeconomics. Pearson Education.

Babor Ahmad
Lecture,
Department of Economics,
Dhaka International University (DIU), Bangladesh