3). Production Possibility Frontiers

• What is a production possibility frontier?


  A graphical representation of the maximum amount of goods and services which an economy or firm can produce with its existing resources at existing factor productivity.
• What does a production possibility frontier show?

  Alternative combinations of goods and services attainable when all resources are fully efficiently and effectively employed.
• What is productive efficiency?

  Producing goods and services at the lowest possible cost using the least amount of scarce resources.
• What is pareto efficiency?

  Pareto efficiency, or Pareto optimality, is a state of allocation of resources in which it is impossible to make any one party better off without making at least one party worse off.
• Causes of shifts in the PPF:

  • Higher productivity/efficiency of factor inputs
  • Better management of factor inputs
  • Increase in the stock capital and labour supply
  • Innovation and invention of new products and resources
  • Discovery/extraction of new natural resources
• What does a shift indicate on a PPF?

  A shift of the 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 has been a change in the number of resources and/or the technology available to the country and so their potential output has changed.
• What does a movement indicate on a PPF?

  A movement along the curve indicates a change in the combination of goods produced: more capital goods are produced and less consumer goods are produced, or vice versa. The same amount of resources are allocated amongst the two goods differently.