1.1.4 Production possibility frontiers

WHAT IS PPF

• shows the maximum possible combinations of capital and consumer goods that the economy can produce with its current resources and technology

• usually a curve- means that when you move down along the PPF, as more resources are allocated towards Good Y, then the extra output created gets smaller.

• explained by the law of diminishing marginal returns- it occurs bc not all factor inputs are equally suited to producing different goods leading to lower productivity

MICROECONOMIC PPF

• looks at 2 products- business may reallocate their factor inputs towards one product

• this involves opportunity cost bc some output of the alternative good is sacrificed

MAX PRODUCTIVE POTENTIAL OF ECONOMY

• any point on the curve represents the max productive potential of the economy, the most that country can produce

• efficient allocation of resources

OPPORTUNITY COST THROUGH MARGINAL ANALYSIS (curve)

• straight line PPF is an indication of perfect sustainability of capital and labour inputs

• moving from A to B, the OC of producing an extra 15 consumer goods is 30 capital goods

• producing 60 capital goods (point A) the OC would be 20 consumer goods

OPPORTUNITY COST THROUGH MARGINAL ANALYSIS (straight)

• OC of producing 1 consumer good is 3 capital goods bc 600/200=3 (1 consumer good produced, 3 capital goods lost)

• OC of producing 1 capital good is 1/3 of a consumer good

ECONOMIC GROWTH OR DECLINE

• purple arrow show that the economy has grown bc it can produce more of both goods- growth may be achieved by increasing the quantity and/or quality of resources

• orange arrow show the economy is declining as it can produce less goods than previously- could be cause by no. of factors: natural disasters, natural resources ran out, decrease in quantity/quality of labour (due to migration or fall in education

EFFICIENT OR INEFFICIENT ALLOCATION OF RESOURCES/ UNOBTAINABLE PRODUCTION

• economic efficiency is achieved when resources are used for their best use.

• economy will aim to produce on the curve(mainly A)- POSSIBLE AND EFFICIENT

• B- POSSIBLE BUT INEFFICIENT, producing within the curve so not maximising output

• C- UNOBTANAIBLE- beyond the PPF so not enough resources/ technology to produce

• D and E are not likely- can only produce one good

CHANGE IN PRODUCTION (efficient)

• diagram shows increase in ability to produce consumer goods but not capital goods

• could be due to an improvement in technology that makes production of consumer goods more efficient

CHANGE IN PRODUCTION (inefficient)

• diagram shows a fall in capital production but not in consumer production

• shows a fall in efficiency or a change in resources that only affects capital good manufacture

PPF MOVEMENTS

• movement along curve indicates a change in the combination of goods produced

• more capital goods are produced and less consumer goods produced, or vice versa

• same amount of resources allocated amongst the 2 goods efficiently

PPF SHIFTS

• shift in curve indicates a change in the productive potential of the economy

• more consumer and capital goods can be produced or less consumer and capital goods can be produced

• there’s been a change in the no. of resources and/or the tech available to the country and so their potential output has changed

CAPITAL GOODS

• Goods that are produced in order to aid the production of consumer goods in the future 

• Some goods can be both consumer and capital goods, for example computers 

CONSUMER GOODS

• Goods that are demanded and bought by households and individuals 

INWARD SHIFT (L)

• A long-term fall in productivity of labour perhaps due to a decline in the quality of machinery

INWARD SHIFT (M)

• Large scale migration of people out of a country perhaps when there is high unemployment or a depression

INWARD SHIFT (N)

• The damaging effects of severe natural disasters such as tsunamis, earthquakes, floods, persistent drought and other extreme weather events many of which are now directly linked to the impact of climate change

INWARD SHIFT (W)

• The destruction caused by war and other types of conflict

OUTWARD SHIFT (L)

• Discovery of new natural resources (land)

• Discovery of commercially viable land drives higher extraction 

OUTWARD SHIFT (I)

• Innovation and invention of new products and resources

• Improved production processes help to lift efficiency so that we can get more outfit from given inputs

OUTWARD SHIFT (S)

• Increase in the stock of capital and labour supply

• From inward labour migration/increased capital investment

OUTWARD SHIFT (E)

• Higher productivity/efficiency of factor inputs

• This increases the output per unit of an input used in production 

OUTWARD SHIFT (M)

• Better management of factor inputs

  = Improved management reduces waste and improves quality