production possibility frontier’s

• Production Possibility Frontiers (PPFs) help economists analyze trade-offs by showing the maximum potential combinations of two goods/services attainable when all resources are fully and efficiently employed
• Capital goods are goods used in the production of other goods like factories, roads, and machines
• Consumer goods are goods and services used by people to satisfy wants and needs
• A PPF is drawn concave to the origin, meaning that as more resources are allocated towards Good Y, the extra output gets smaller
• The law of diminishing marginal returns explains why a PPF is concave, as not all factor inputs are equally suited to producing items, leading to lower productivity
• Combinations inside the PPF occur when there are unemployed resources or when resources are used inefficiently
• Moving towards the PPF increases the total output of goods and services
• Combinations beyond the PPF are unattainable at the moment
• Trade between countries allows nations to consume beyond their own PPF, potentially leading to gains in economic welfare
• Producing more of both goods with the same resources shows an improvement in welfare and a gain in allocative efficiency
• Production Possibility Frontier (PPF) shows the maximum output of different goods an economy can produce when all resources are fully utilized
• Factors affecting the PPF:

  • Capital goods needed
  • Factor resources and roads
  • Specialization in production
• The marginal (extra) output of cotton diminishes as more factor resources are allocated to it, leading to an increase in the opportunity cost measured in marginal wheat output
• 100 extra tonnes of cotton involves sacrificing 40 tonnes of wheat, with an opportunity cost of 4/10 of a tonne of wheat for each extra tonne of cotton
• A straight line PPF indicates perfect factor substitutability of resources and being productively efficient when an economy is on its production possibility frontier
• Changes in production technology or more factor inputs can cause the PPF to shift outwards, leading to an increase in a country's potential output
• Assumptions of the PPF curve:

  • Only 2 goods are produced
  • Limited resources
  • No new technology
  • Resources are unequally efficient
  • The PPF curve is concave because not all resources are equally efficient
• If the PPF is a straight line, then the marginal opportunity cost of switching resources between consumer and capital goods is constant
• A straight line PPF indicates that all resources are equally efficient
• Causes of outward shifts in the Production Possibility Frontier (PPF):

  • Higher productivity efficiency of factor inputs increases the output per unit input
  • Better management of factor inputs reduces waste and improves quality
  • Increase in stock of capital and labour supplies
  • Innovation and invention of new products and resources boosts efficiency
  • Discovery of new natural resources (land)
• Causes of inward shifts in the Production Possibility Frontier (PPF):

  • Damaging effects of natural disasters e.g. earthquakes, drought, and floods
  • Destruction / loss of factor inputs caused by civil wars and conflict
  • Large scale net outward labour migration e.g. due to an economic depression
  • Decline in the productivity of inputs perhaps caused by a recession
• During an economic recovery, Aggregate Demand (AD) will be rising, leading to an increase in real national output and a fall in the amount of space capacity, moving the curve closer to the PPF boundary
• A rise in a country's productivity causes the PPF to shift out from PPF1 to PPF2, allowing increased supply of both consumer and capital goods
• Successful supply side policies can help bring an outward shift of a country's PPF