INTRODUCTION:-

A production–possibility frontier (PPF) or production possibility curve (PPC) is a

curve which shows various combinations of the amounts of two goods which
can be produced within the given resources and technology/a graphical
representation showing all the possible options of output for two products
that can be produced using all factors of production, where the given
resources are fully and efficiently utilized per unit time. A PPF illustrates
several economic concepts, such as allocative efficiency, economies of scale,
opportunity cost (or marginal rate of transformation), productive efficiency,
and scarcity of resources (the fundamental economic problem that all societies
face).

This tradeoff is usually considered for an economy, but also applies to each
individual, household, and economic organization. One good can only be
produced by diverting resources from other goods, and so by producing less of
them.

This Photo by Unknown Author is licensed under CC BY-SA

Graphically bounding the production set for fixed input quantities, the PPF
curve shows the maximum possible production level of one commodity for any
given production level of the other, given the existing state of technology. By
doing so, it defines productive efficiency in the context of that production set:
a point on the frontier indicates efficient use of the available inputs (such as
points B, D and C in the graph), a point beneath the curve (such as A) indicates
inefficiency, and a point beyond the curve (such as X) indicates impossibility.

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 CHARACTERISTICS OF PPC:-
 PPC is always downward sloping: Taking a simple example,
think of 2 goods, guns and butter being produced by army and
farmers respectively. Now say the economy is in a peaceful
state so not many guns are being produced, and a lot of butter
is being produced (Point D on the graph). Now, say there’s a
war, which needs a lot of guns to be produced. So as you
divert more and more people to produce guns, fewer people
will be able to produce butter. This would mean that less
amount of butter would be produced in order to produce more
guns due to limited resources. This can be thought of in
another way - As you go from left to right, you can only
produce more of butter, but reducing the number of guns
since the amount of resources in an economy are fixed.

 PPC is concave to the point of origin: It is important to

understand why PPC is concave to origin. The slope of the
PPC is known as the marginal rate of transformation, also
known as the opportunity cost, which tells us how many units
of one good the economy has to forego in order to produce
one more unit of the other good. Mathematically, the slope
can be a straight line (indicating constant MRT), or even
convex (indicating decreasing MRT). However, in real life we
would expect MRT to rise, which means that as you go from
left to right, you will have to forgo more and more of one good,
to produce the other.

 Growth in resources/Technological advancement may lead to

outward shift in PPC: It is impossible for an economy to
produce at any point beyond the PPC. However, the PPC can
shift outward due to increase in the resources available, or
when technological advancement takes place and the
economy is now able to produce more goods using the same
resources. It can also be the case that the PPC shifts
downward and that can happen when, say there’s a natural
calamity.

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ALLOCATIVE EFFICIENCY:-

The term refers to the degree of equality between the marginal

benefits and marginal costs. The marginal cost is the cost of
producing one additional item, and is used to pinpoint the optimal
economy of scale. The marginal benefit is the greater enjoyment
created by producing one additional item.
Allocative efficiency will occur when both consumers and
producers have free access to information, allowing them both to
make the most efficient possible decisions in purchasing and
production. According to this principle, it is also necessary that
consumer have free choice over the goods/services that maximize
their individual satisfaction.

Operating in accordance with allocative efficiency ensures the

correct resource allotment in terms of consumer needs and
desires. Virtually all resources (i.e. factors of production) are
limited; therefore, it’s important to make the right decisions
regarding where to distribute resources in order to maximize
value.

The aim is to achieve the ideal opportunity cost. The opportunity

cost of a particular thing is the value that must be sacrificed in
order to put resources of time, money, etc. toward that thing.

Economies of scale ensure that opportunity costs decrease as

production levels increase, up to a point. Then, past certain levels
of production, opportunity cost may begin to increase once again.
Likewise, with higher supply, demand decreases.

The market equilibrium is the point at which value for society as a

whole has been maximized, and allocative efficiency has been
achieved. For these reasons, aiming to achieve allocative
efficiency is valuable to both consumers and producers.

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MARGINAL COST:-

Marginal cost is the additional cost incurred in the production of one

more unit of a good or service. It is derived from the variable cost of
production, given that fixed costs do not change as output changes,
hence no additional fixed cost is incurred in producing another unit of a
good or service once production has already started.

Example

Output Total cost (£) Marginal cost (£)

10 400
11 700 300
12 800 100
13 1000 200
14 1500 500

Marginal cost will tend to fall at first, but quickly rise as marginal returns
to the variable factor inputs will start to diminish, which makes the
marginal factors more expensive to employ. This is referred to as the
'law of diminishing marginal returns'.

Marginal cost is significant in economic theory because a profit

maximising firm will produce up to the point where marginal cost (MC)
equals marginal revenue (MR).

If the cost function C is continuous and differentiable, the marginal cost

(MC) is the first derivative of the cost function with respect to the output
quantity Q.

MC(Q)= dC
dQ

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OPPORTUNITY COST:-
Opportunity costs represent the benefits an individual, investor or
business misses out on when choosing one alternative over another.
While financial reports do not show opportunity cost, business owners
can use it to make educated decisions when they have multiple options
before them.

Because by definition they are unseen, opportunity costs can be easily

overlooked if one is not careful. Understanding the potential missed
opportunities foregone by choosing one investment over another allows
for better decision-making.

The formula for calculating an opportunity cost is simply the difference

between the expected returns of each option. Say that you have option
A, to invest in the stock market hoping to generate capital gain returns.
Option B is to reinvest your money back into the business, expecting
that newer equipment will increase production efficiency, leading to
lower operational expenses and a higher profit margin.

Assume the expected return on investment in the stock market is 12

percent over the next year, and your company expects the equipment
update to generate a 10 percent return over the same period. The
opportunity cost of choosing the equipment over the stock market is
(12% - 10%), which equals two percentage points. In other words, by
investing in the business, you would forgo the opportunity to earn a
higher return.

KEY TAKEAWAYS

 Opportunity cost is the return of a foregone option less the

return on your chosen option.
 Considering opportunity costs can guide you to more
profitable decision-making.
 You must assess the relative risk of each option in
addition to its potential returns.

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 PRODUCTIVE EFFICIENCY:-
Productive efficiency is concerned with producing goods and services
with the optimal combination of inputs to produce maximum output for
the minimum cost.
To be productively efficient means the economy must be producing on
its production possibility frontier. (i.e. it is impossible to produce more of
one good without producing less of another).

 Points A and B are productively efficient.

 Point D is inefficient because you could produce more goods or
services with no opportunity cost
 Point C is currently impossible.

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CENTRAL PROBLEMS OF AN ECONOMY:-

Human wants are unlimited and the resources to satisfy these wants are
scarce. Every individual tries to satisfy more and more of his wants. The
scarcity of resources in relation to wants give rise to the problem “how to
use limited resources to get maximum satisfaction”. This give rise to
problem of choice which means we have to select the best alternative
among all. The central problems of an economy is further divided into
four following basics problems.

The problem of choice arises on account of the pressure of three

interrelated facts, viz, human wants are unlimited, means required to
satisfy these wants are limited and means are capable of being put to
alternative uses. There would be no problem if the scarce means had
only a single use. However, in reality, these scarce means have
alternative uses.

Thus, whenever the problems of choice and scarcity arise, economics is

said to be emerged, this is why, every economy has to face and solve
the following basic problems:

It requires that decisions regarding the following should be made:

 What to produce? (Types and amount of commodities

to be produced):

Land, labour, capital, machines, tools, equipment’s and natural

means are limited. Every demand of every individual in the
economy cannot be satisfied, so the society has to decide what
commodities are to be produced and to what extent. Goods
produced in an economy can be classified as consumer goods and
producer goods. These goods may be further classified as single use
goods and durable goods.

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  How to produce? (Problem of the selection of the
technique of production – choice between labour-
intensive and capital-intensive techniques):

After the decision regarding the goods to be produced is taken, next

problem arises as to what techniques should be adopted to produce
commodity. Goods can be produced in large-scale industries or in
small-scale village and cottage industries. The economy has to
decide between automatic machines and handicrafts.

Hence two main options are-either capital- intensive technology

(more capital and less labour) or labour-intensive technology (more
labour and less capital). The economy has to decide about the
technique of production on the basis of labour and capital.

 For whom to produce? (Problem of distribution of

income):

Goods and services produced in the economy are consumed by its

citizens. The individuals may belong to economically weaker
sectioned or rich class of people. Actually this is the problem of
distribution. In case of capitalism the decision is taken on the basis
of the purchasing powers of the consumers. Socialistic economy
takes decision regarding goods and services to be produced on the
basis of requirements of the individuals.

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MARGINAL RATE OF TRANSFORMATION:-

The marginal rate of transformation (MRT) can be defined as how

many units of good x have to stop being produced in order to
produce an extra unit of good y, while keeping constant the use of
production factors and the technology being used. It involves the
relation between the production of different outputs, while
maintaining constant the same level of production factors. It can be
determined using the following formula:

KEY TAKEAWAYS

 MRT is the number of units that must be forgone in order to

create or attain a unit of another good, considered the
opportunity cost to produce one extra unit of something.

 MRT is also considered the absolute value of the slope of the

production possibilities frontier.

 The marginal rate of substitution focuses on demand, while

MRT focuses on supply.

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ATTAINABLE COMBINATIONS:-

Attainable combination, is a combination of production which is

feasible. What it assumes is, that by producing one product, the
ability to produce another falls. In other words, there exist an
opportunity cost on production. Lets assume that you have 500
work hours to distribute, this could be oil, energy, whatever that
limits production of another type of product, and that you can
either produce cars or nails. You need 10 hours to build a car,
and can create 10k nails in an hour. An attainable combination
would thus be any possible combination of the two. This could
be 50 cars and 0 nails or 5.000k nails and 0 cars. It cannot be
51 cars and 0 nails, nor can it be 25 cars and 3.000 nails, as
this combination is not attainable.

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ECONOMICS OF SALE:-
Economies of scale are cost advantages reaped by companies
when production becomes efficient. Companies can achieve
economies of scale by increasing production and lowering costs.
This happens because costs are spread over a larger number of
goods. Costs can be both fixed and variable.

The size of the business generally matters when it comes to

economies of scale. The larger the business, the more the cost
savings.

Economies of scale can be both internal and external. Internal

economies of scale are based on management decisions, while
external ones have to do with outside factors.

Most consumers don't understand why a smaller business charges

more for a similar product sold by a larger company. That's
because the cost per unit depends on how much the company
produces. Larger companies are able to produce more by
spreading the cost of production over a larger amount of goods. An
industry may also be able to dictate the cost of a product if there
are a number of different companies producing similar goods within
that industry.

There are several reasons why economies of scale give rise to

lower per-unit costs. First, specialization of labor and more
integrated technology boost production volumes. Second, lower
per-unit costs can come from bulk orders from suppliers, larger
advertising buys, or lower cost of capital. Third, spreading internal
function costs across more units produced and sold helps to reduce
costs.

Internal functions include accounting, information technology, and

marketing. The first two reasons are also considered operational
efficiencies and synergies. The second two reasons are cited as
benefits of mergers and acquisitions.

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MAKE IN INDIA:-

Prime Minister Narendra Modi launched the Make in India initiative

on September 25, 2014, with the primary goal of making India a
global manufacturing hub, by encouraging both multinational as
well as domestic companies to manufacture their products within
the country. Led by the Department of Industrial Policy and
Promotion, the initiative aims to raise the contribution of the
manufacturing sector to 25% of the Gross Domestic Product (GDP)
by the year 2025 from its current 16%. Make in India has introduced
multiple new initiatives, promoting foreign direct investment,
implementing intellectual property rights and developing the
manufacturing sector.
It also seeks to facilitate job creation, foster innovation, enhance
skill development and protect intellectual property. The logo of
‘Make in India’ – a lion made of gear wheels – itself reflects the
integral role of manufacturing in government’s vision and national
development. The initiative is built on four pillars which are as
follows:

 New processes- The government is introducing several

reforms to create possibilities for getting Foreign Direct
Investment (FDI) and foster business partnerships. Some
initiatives have already been undertaken to alleviate the
business environment from outdated policies and regulations.
This reform is also aligned with parameters of World Bank's
'Ease of Doing Business' index to improve India's ranking on
it.

 New infrastructure- Infrastructure is integral to the growth of

any industry. The government intends to develop industrial
corridors and build smart cities with state-of-the-art technology
and high-speed communication. Innovation and research
activities are supported by a fast-paced registration system
and improved infrastructure for Intellectual Property Rights
(IPR) registrations. Along with the development of

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 infrastructure, the training for the skilled workforce for the
sectors is also being addressed.

 New sectors- ‘Make in India’ has identified 25 sectors to

promote with the detailed information being shared through an
interactive web-portal. The Government has allowed 100%
FDI in Railway and removed restrictions in Construction. It has
also recently increased the cap of FDI to 100% in Defence
and Pharmaceutical.

 New mindset- Government in India has always been seen as

a regulator and not a facilitator. This initiative intends to
change this by bringing a paradigm shift in the way
Government interacts with various industries. It will focus on
acting as a partner in the economic development of the
country alongside the corporate sector.

‘Zero defect zero effect’ is a key phrase which has come to be

associated with the Make in India campaign. In the words of Prime
Minister Narendra Modi, “Let’s think about making our product which has
'zero defect'… and 'zero effect' so that the manufacturing does not have
an adverse effect on our environment". Thus, sustainable development
in the country is being made possible by imposing high-quality
manufacturing standards while minimising environmental and ecological
impact.

Within the short span of time, there are many instances of the initiative’s
success. In December 2015, Micromax announced that it would put up
three new manufacturing units in Rajasthan, Telangana and Andhra
Pradesh. Japan announced it would set up a USD 12 billion fund for
Make in India-related projects, called the “Japan-India Make-in-India
Special Finance Facility” after the Japanese Prime Minister Shinzo Abe’s
visit to the country. Huawei opened a new Research and Development
(R&D) campus in Bengaluru and is in the process of setting up a
telecom hardware manufacturing plant in Chennai. France-based LH
Aviation signed a Memorandum of Understanding (MoU) with OIS
Advanced Technologies to set up a manufacturing facility in India for
producing drones. Foxconn announced it would invest USD 5 billion over
five years for R&D and creating a hi-tech semiconductor manufacturing
facility in Maharashtra.

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HOW ‘MAKE IN INDIA’ WILL AFFECT PPC
OF INDIAN ECONOMY:-
The foreign companies investments in Make in India project will
have a great impact on Indian economy. It’s direct relation is
with GDP of the country. With the investment in the
manufacturing sector, advancement in the technology,
generation of the employment opportunities, and the ways to
make the labour skilled, our country will be touching the sky of
success in just a matter of few years; if everything done
dutifully. Now, another point is , the main focus of Make in India
is on manufacturing sector and the major population of India is
either middle or lower-middle class. Hence, the products
manufactured by the foreign companies would be targeting
upper section of the country. So, it might not be a very huge
achievement in terms of aspirations of “Make in India” project.
But, in spite of this , ultimately increased manufacturing in the
country will lead to an increase in Gross Domestic Product of
India and there would be an outward shift in Production
Possibility Curve of the Indian Economy.
So, when investments increases by make in India
campaign, it will make PPC shift rightward as production
will increase.
It represents economic growth. Economic growth is an
increase in what an economy can produce if it is using all its
scarce resources. An increase in an economy's productive
potential can be shown by an outward shift in the economy's
production possibility frontier (PPF).

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