Production possibility fronteirs

What is a Production Possibility Frontier (PPF)?

A graphical representation that illustrates the maximum output of two goods or services that an economy can produce given its available resources and technology, assuming full utilisation of resources and a fixed level of technology

Why is a PPF useful?

• Scarcity: shows the limbs to productive capacity of an economy due to limited resources

• Trade-offs: Shows what is lost as a result of an alternative choice when making a product or service

• Opportunity Cost: the cost of a decision (a description of the trade off) it shows how much its worth

What does a PPF look like?

How do you calculate opportunity cost?

Opportunity cost = Lost output of Good X / Gained output of Good Y

Example from lesson: From A to B: = 60/ 10= 6 units of wheat per extra unit of beef

What is the law of diminishing return?

when one factor of production is fixed in the short run, adding more and more units of a variable input (like labour) will eventually result in smaller and smaller increases in total output

How does the law of diminishing return apply to the PPF

as more of one good is produced by adding variable resources to fixed resources, the marginal output of the additional variable input eventually declines

Why might opportunity cost be constant?

hen resources are perfectly adaptable between two good leading to an inversely direct line on a PPF

When resources are perfectly interchangeable resulting in a inversely direct proportional line

What are capital goods?

Capital goods: a capital good is a durable, man-made item used in the production of other goods and services, rather than for direct consumption.
Example: machinery, software, industrial sewing machine

What are consumer goods?

Consumer goods: consumer goods are final products purchased by individuals or households for their personal use, satisfaction, or enjoyment, rather than being used to produce other goods
Example: food, sewing machine

What does the outward shift of the PPF indicate?

Potential Economic growth

What is potential economic growth

Potential economic growth=an expansion in the productive capacity

 How does this affect the total output of two options on the PPF?

Means that the output of wheat can be increased without having to sacrifice any output

Q5. What might cause the PPF to shift outward?

-An increase in the quantity and quality of factors of production,

-An increase In a country's productivity/productive capacity

-An increase in potential output/potential economic growth

What causes an increase in factor endowments

-increase quantity /quality of land, labour capital or enterprise

What are the causes of an outwards shift?

Human capital, natural resources, technology, capital investment

What is the impact of human capital?

Better-educated and more   skilled workers Leads to increased potential production in a country (better output as more ppl are skilled)

What is the impact of natural resources

For example if a country discovers new oil reserves As a result that means more resources are available therefore more production capacity

what is the impact of technology

Technological progress allows an economy to Produce it more efficiently

what is the impact of capital investment

Increased investment in   physical capital, such as infrastructure, machinery, and technology Allow for more efficient resources by having better machinery and work at a better rate

How do farmers increase the quality of agricultural land?

Irrigation, drainage, fertilizers

How can the quantity of Labour be increased?

-Increase net migration

-Increase in the birth rate

-Decrease in the death rate

-Increase in the age of retirement?

How can the quality of Labour be increased?

education and training

-access to healthcare

-increase mobility of Labour

How can Capital be increased?

-Inward foreign direct investment (FDI)

-Improvement in technology

-Investment loans from abroad

-Improvement in infrastructure

What does a PPF look like where there is only a improvement in one industry

what does a point inside the PPF represent?

inefficient because not all resources are being utilized

What does a point on the PPF represent?

are efficient combinations as they are on the curve

What does a point outside teh PPF represent?

not yet attainable as it lies beyond the existing PPF

What might cause a fall in productive potential? causing the inwards shift of the PPF

Changes in the economy:

-natural disasters

-war

-brain drain

Anything that causes a destruction of reduction of the quantity or quality of FOPs

Anything that reduces productivity