1.1.4 Production Possibility Frontiers (Micro)

Production Possibility Frontiers (PPFs)

They help economists to analyse trade- offs. They show the maximum possible combination of goods/services that can be produced using all available resources.

Production Possibility Curve (PPC)

Its 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

When there is a point inside the PPF curve

Represents an inefficient use of resources, where the economy is producing less than its maximum potential output

Why would PPF be curved

A Production Possibilities Frontier (PPF) graph is typically curved because of increasing opportunity costs. This means resources are not equally efficient at producing all goods.

GRADIENT OF GRAPH

The gradient of the graph represents the oppurtunity cost. To work out gradient To calculate the gradient m= rise / run or y-y/ x-x

WHAT DOES A PPF GRAPH SHOW

Efficiency: points along the PPF represents an efficient use of resources, where the economy is fully utilising all available resources to produce goods and services. Points inside the PPF are inefficient.

Constraints and Growths: The PPF can shift outward or inward based on changes in the availability of resources, technological advancements, or improvements in productivity. An outward shift in the PPF indicates economic growth.

The oppurtunity Cost: The cost of producing one product more than another, what could have been gained if you had forgone a different alternative.

Assumptions: The PPF diagram make several assumptions, such as fixed resources, a given level of technology, and full resource utilisation. The assumptions may not always hold.

PPF CURVE SHIFTING OUTWARDS

A PPF shifts outwards indicates economic growth

WHY THE PPF CAN SHIFT OUTWARDS

Increase in natural resources: for example discovering new oil reserves

Technological Advancements: technological progress allows an economy to produce more output more effectively

Human Capital Development: Better- educated and more skilled workers can increase productivity, leading to the production of more goods and services

Investment in capital: increased investment in physical capital.

PIVOTAL SHIFT

Higher productivity in one of the industries can cause the curve to pivot (e.g less resources producing the same product)

PRODUCTIVE EFFICIENCY

Occurs when an economy is producing goods and services at the lowest possible cost, given its existing technology and resources. Becuase its at its lowest cost it allows maximum output. The productive efficiency is achieved when the economy is operating on the PPF curve.

ALLOCATIVE EFFICIENCY

Occurs when an economy is producing a mix of goods and services tht best aligns with consumer preferences and social needs. It represents the ideal distribution of resources among different goods to maximise overall satisfaction. Allocative efficiency is acheived when the economy is producing at a point on the PPPF that matches society's preferences (humans infinite demands).

DYNAMIC EFFICIENCY

Refers to an economy's ability to grow and expand. This involves shifting the PPF outwards, so producing more goods and services than before with the same resources.