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The Production Possibility Frontier
Applying the PPF concept
• Opportunity cost
• Gains from specialisation and trade
• Showing economic growth
Some topical i...
Production Possibility Frontiers (PPF)
• We normally draw a PPF as
concave to the origin i.e.
when we move down along
the ...
Production Possibility Frontier (PPF)
Output of
Pizza
Output of Sugar
A
B
A, B and C are
all efficient
output
combinations...
The PPF and Economic Efficiency
• Combinations of the output of consumer and capital goods lying
inside the PPF happen whe...
The PPF and Opportunity Cost
Output of
Wheat
Output of Cotton
200
160
300 400
A
B
The opportunity cost of
employing more r...
PPF, Diminishing Returns and Opportunity Cost
Output of
Wheat
Output of Cotton
200
160
300 400
A
B
With diminishing return...
Drawing a Linear Production Possibility Frontier
Output of
consumer
goods
Output of capital goods
PPF1
Movements along a P...
Outward Shift in the Production Possibility Frontier
Output of
consumer
goods
Output of capital goods
PPF1 PPF2
Changes in...
Causes of Shifts in the Production Possibility Frontier
Cause of an outward shift in the
Production Possibility Frontier
B...
Can the Production Possibility Frontier shift inwards?
Yes – productive potential can contract – here are some causes
Dama...
A magnitude-7.8 earthquake struck Nepal during April,
killing as many as 10,000 people and causing catastrophic
damage thr...
Can the Production Possibility Frontier shift inwards?
Yes – productive potential can contract – here are some causes
Dama...
Can the Production Possibility Frontier shift inwards?
Yes – productive potential can contract – here are some causes
Dama...
Can the Production Possibility Frontier shift inwards?
Yes – productive potential can contract – here are some causes
Dama...
Can the Production Possibility Frontier shift inwards?
Yes – productive potential can contract – here are some causes
Dama...
The Production Possibility Frontier
Production Possibility Frontier (Revision Presentation)
Production Possibility Frontier (Revision Presentation)
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Production Possibility Frontier (Revision Presentation)

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This is a revision presentation on aspects of the production possibility frontier

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Production Possibility Frontier (Revision Presentation)

  1. 1. The Production Possibility Frontier
  2. 2. Applying the PPF concept • Opportunity cost • Gains from specialisation and trade • Showing economic growth Some topical issues: 1. Economic effects of natural disasters 2. The collapse of fish stocks / deforestation 3. Debate over investment in fracking 4. Economics of labour migration
  3. 3. Production Possibility Frontiers (PPF) • We normally draw a PPF as concave to the origin i.e. when we move down along the PPF, as more resources are allocated towards Good Y the extra output gets smaller • This is explained by the law of diminishing marginal returns, it occurs because not all factor inputs are equally suited to producing items leading to lower productivity A PPF shows the output combinations of two goods or services attainable when all resources are fully and efficiently employed A B C Output of Good X Output of Good Y X1 X2 X3 Y1 Y2 Y3
  4. 4. Production Possibility Frontier (PPF) Output of Pizza Output of Sugar A B A, B and C are all efficient output combinations as they lie on the existing PPF C D E F D and E are inefficient combinations – i.e. not all resources fully utilized F is an output combination that is not yet attainable as it lies beyond the PPF
  5. 5. The PPF and Economic Efficiency • Combinations of the output of consumer and capital goods lying inside the PPF happen when there are unemployed resources or when resources are used inefficiently. We could increase total output of goods and services by moving towards the PPF • Combinations of goods and services that lie beyond the PPF are unattainable at the moment • A country would require an increase in factor resources, an increase in productivity and/or an improvement in technology to achieve an outward shift of the PPF • Trade between countries also allows nations to consume beyond their own PPF potentially leading to gains in economic welfare • Producing more of both goods with the same resources represents an improvement in welfare and a gain in allocative efficiency
  6. 6. The PPF and Opportunity Cost Output of Wheat Output of Cotton 200 160 300 400 A B The opportunity cost of employing more resources into cotton production is expressed in terms of the output of wheat given up One hundred extra tonnes of cotton involves sacrificing 40 tonnes of wheat – the opportunity cost is 4/10ths of a tonne of wheat for each extra tonne of cotton Examiners are keen that you understand the concept of opportunity cost in relation to the PPF!
  7. 7. PPF, Diminishing Returns and Opportunity Cost Output of Wheat Output of Cotton 200 160 300 400 A B With diminishing returns, the marginal (extra) output of cotton diminishes as more factor resources are allocated to it. C 80 480 The result is that the opportunity cost measured in lost wheat output increases To be productively efficient, an economy must be on its production possibility frontier
  8. 8. Drawing a Linear Production Possibility Frontier Output of consumer goods Output of capital goods PPF1 Movements along a PPF require a reallocation of factor resources 90 60 30 10 25 40 If the production possibility frontier is a straight line, then the marginal opportunity cost of switching resources between consumer and capital goods is constant. For example, the marginal opportunity cost of producing an extra 15 capital goods is 30 consumer goods i.e. the opportunity cost is 2 consumer goods per extra capital good
  9. 9. Outward Shift in the Production Possibility Frontier Output of consumer goods Output of capital goods PPF1 PPF2 Changes in production technology can cause the PPF to shift outwards – this leads to an increase in a country’s potential output 60 25 42 An improvement in the technology available to produce capital goods (other factors held constant) will lead to an outward shift in the production possibility frontier. After the shift in the PPF more capital goods can be produced for each level of output of consumer goods
  10. 10. Causes of Shifts in the Production Possibility Frontier Cause of an outward shift in the Production Possibility Frontier Brief comment on the cause of the shift in the PPF • Higher productivity / efficiency of factor inputs This increases the output per unit of input used in production • Better management of factor inputs Improved management reduces waste and improves quality • Increase in the stock of capital and labour supply e.g. from inward labour migration / capital investment • Innovation and invention of new products and resources Improved production processes helps to boost efficiency • Discovery / extraction of new natural resources (land) Discovery of commercially viable land inputs drives extraction
  11. 11. Can the Production Possibility Frontier shift inwards? Yes – productive potential can contract – here are some causes Damaging effects of natural disasters such as drought, a tsunami, an earthquake and severe floods Destruction / loss of factor inputs caused by civil war and other forms of conflict that last for many years Large scale net outward labour migration e.g. due to an economic depression that leads to a brain drain of skilled workers A trend decline in the productivity of inputs perhaps caused by a persistent recession which causes net investment to be negative Causes of an inward shift of the a nation’s PPF
  12. 12. A magnitude-7.8 earthquake struck Nepal during April, killing as many as 10,000 people and causing catastrophic damage throughout Nepal, India, China, and Bangladesh. Preliminary economic losses were expected to reach and possibly exceed USD5.0 billion – which would equal to at least 25 percent of Nepal's gross domestic product (GDP) – with very low insurance penetration in the region. Government figures revealed that more than 700,000 homes and other structures were damaged or destroyed by the earthquake, as well as dozens of historical sites
  13. 13. Can the Production Possibility Frontier shift inwards? Yes – productive potential can contract – here are some causes Damaging effects of natural disasters such as drought, a tsunami, an earthquake and severe floods Destruction / loss of factor inputs caused by civil war and other forms of conflict that last for many years Large scale net outward labour migration e.g. due to an economic depression that leads to a brain drain of skilled workers A trend decline in the productivity of inputs perhaps caused by a persistent recession which causes net investment to be negative Causes of an inward shift of the a nation’s PPF
  14. 14. Can the Production Possibility Frontier shift inwards? Yes – productive potential can contract – here are some causes Damaging effects of natural disasters such as drought, a tsunami, an earthquake and severe floods Destruction / loss of factor inputs caused by civil war and other forms of conflict that last for many years Large scale net outward labour migration e.g. due to an economic depression that leads to a brain drain of skilled workers A trend decline in the productivity of inputs perhaps caused by a persistent recession which causes net investment to be negative Causes of an inward shift of the a nation’s PPF
  15. 15. Can the Production Possibility Frontier shift inwards? Yes – productive potential can contract – here are some causes Damaging effects of natural disasters such as drought, a tsunami, an earthquake and severe floods Destruction / loss of factor inputs caused by civil war and other forms of conflict that last for many years Large scale net outward labour migration e.g. due to an economic depression that leads to a brain drain of skilled workers A trend decline in the productivity of inputs perhaps caused by a persistent recession which causes net investment to be negative Causes of an inward shift of the a nation’s PPF
  16. 16. Can the Production Possibility Frontier shift inwards? Yes – productive potential can contract – here are some causes Damaging effects of natural disasters such as drought, a tsunami, an earthquake and severe floods Destruction / loss of factor inputs caused by civil war and other forms of conflict that last for many years Large scale net outward labour migration e.g. due to an economic depression that leads to a brain drain of skilled workers A trend decline in the productivity of inputs perhaps caused by a persistent recession which causes net investment to be negative Causes of an inward shift of the a nation’s PPF
  17. 17. The Production Possibility Frontier

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