An economy is a system that helps to produce goods and services and enables people to earn their living.

Production Possibility Curve (PPC) is concave to the origin because of the increasing opportunity cost. As we move down along the PPC, to produce each additional unit of one good, more and more units of other good need to be sacrificed. That is, as we move down along the PPC, the opportunity cost increases. And this causes the concave shape of PPC.



In the above graph, AE represents the PPC for capital goods and consumer goods. Suppose the initial production point is B, where 1 unit of capital goods and 48 units of consumer goods are produced. To produce one additional unit of capital good, 4 units of consumer good must be sacrificed (point c). Thus at point c, the opportunity cost of one additional capital good is 4 units of consumer goods. On the other hand, at point D, the opportunity cost of producing one additional unit of capital good is 9 units of consumer goods. Thus, as we move down the PPC from point C to point D, the opportunity cost increases. This confirms the concave shape of PPC.

Central problems and PP curve. PP curve helps in solving central problems of an economy as explained below.

1. What to produce: In fact different points on PP curve depicting different combinations of two goods (like B, C, D, E in Fig) are different choices that are open to society. It is from these choices that society has to select one with the objective of achieving maximum social welfare. For instance, if the society decides to produce more of wheat and less of tanks, it is likely to choose combination E. Conversely if it requires more of tanks, it may choose combination B or C on PP curve in Fig. In short PP curve offers various options to society in the form of different combinations of goods to choose from according to its needs and thus helps solve the problem of 'what to produce'.
   
   
   
   
2. How to produce: The central problem of how to produce is the choice problem of technique of production, i.e., labor-intensive technique or capital-intensive technique. PP curve helps to solve this problem. For instance, if the technique used in production is obsolete, the economy will operate at some point not on the PP curve but inside it. This will inspire the economy to change the technique so as to produce at some point on PP curve itself by making efficient use of its resources.
3. For whom to produce: PP curve reflects how the problem 'for whom to produce' is being solved. If the combination of goods being produced shows an increase in output of luxury goods than necessary goods, it indicates the taste of rich people is being preferred to the needs of poor people. Thus necessary changes can be made.

Economising of resources means best possible use of available resources.

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