1.2: 7-15 production possibility frontiers

• the Production Possibility Frontier (PPF) shows the different combinations of economic goods which an economy is able to produce if all resources in the economy are fully and efficiently utilised.
• any point which lies within the PPF represents the inefficient use of resources, or resources that remain unemployed.
• Any point which lies outside of the PPF represents a level of output that is currently beyond the maximum production level of the economy. These production levels are attainable in the future only if there is economic growth. *Trade allows an economy may to consume beyond the PPF through a trade deficit.
• Any point along the length of the PPF can be described as being pareto optimal (it is impossible to increase the production of one of the two goods without reducing the production of the other).
• Production Possibility Frontier With Increasing Opportunity Costs (Diminishing Returns)

  The PPF is most frequently shown as being concave to the origin. This assumes that not all resources in the economy are as productive in one use as compared to another and is synonymous with the real world.
• A straight line PPF shows a constant opportunity cost between two products. In other words, in order to produce one more car, the economy will have to reduce its production of bikes by two unit. This trade off or opportunity cost remains the same throughout the whole length of the PPF.

  Any PPF that is drawn as being a downward sloping straight line follows the assumption that all resources in the economy are as productive in one use as they are in the other.
• An Outward Parallel shift may arise due to:

  · The introduction of new technology or advances in the techniques of production lead to improvements in productivity and efficiency

  · Additional factors of production being made available to the economy
• Explain questions:

  1. what changed
  2. impact
  3. explain impact
• An Inward shift (parallel or non-parallel) of the PPF might arise due to:

  · A natural disaster occurring

  · A war arises which destroys part of an economy’s productive base

  · A depletion of resources

  · Impact of a deep prolonged economic recession