Production Possibility Curve:

It is one which shows the combination of goods that a society (country) can produce with available resources within the given period of time.

 

In the above diagram, point A is called inefficient point. At this point, the factors of production of the economy are unemployed or lying idle. When a country is producing at point A, it means country can produce more with the available resources. The output of a country can be increased without decreasing the output of another product. Thus there is no opportunity cost of moving from point A to point B

At point B, the economy has fully employed all the resources. Therefore, the output of the country in one good cannot be increased without reducing the output of another good.

Point C is called unattainable. This point is unable to achieve due to lack of resources. In other words, the current amounts of resources are not enough to achieve the output required for point C. In the long run, point C can be achieved if there is an increase in the availability of resources, productivity and technology.

The diagram shows the choices for an individual between leisure and earnings.

 

Q) What is the opportunity cost to the individual of the extra earnings when moving from position X to position Y?

The opportunity cost for Mr. Smith to earn $ 8000 is working additional 4 hours that is to reduce his leisure time to 4 hours. 12 – 8 = 4 hours leisure.