What are production possibility frontiers? This article explains what PPFs are and what causes movements along them and why they may shift inwards or outwards. The article also explains what opportunity costs are and how they can be represented in a PPF.
Welcome to Simply Economics. This article is the second in a series to explain economics to those who want to broaden their scope of the subject. Click here to check out the first article where the definition of economics was discussed.
Before production possibility frontiers are discussed in depth here are a few definitions needed to fully understand what PPFs are:
CONSUMER GOODS – Goods that give utility and satisfaction (ie. are useful) to consumers. Eg. a chocolate bar.
CAPITAL GOODS – Goods that produce consumer goods. Eg. Machine that makes a chocolate bar.
OPPORTUNITY COST – The value of the next best alternative given up as there is not enough wealth to buy both wanted items.
For example, if a person has £10 to spend and there is a shirt for £10 and a pair of shoes for £10, the person only has enough money to buy one item. If the person chooses the shirt then the opportunity cost of buying the shirt are the shoes.
WHAT are production possibility frontiers?
Production possibility frontiers are an economic model that shows the maximum potential level of output of two goods that an economy can reach when all its resources are fully in use. They can be used to show the concept of opportunity cost.
MOVEMENTS ALONG A PPF
A PPF usually shows an economy with capital goods on the y axis and consumer goods on the x axis, as shown in Figure 1.
Figure 1 shows an economy at point X and in order to increase the production of capital goods by 10 there is an opportunity cost of 15 units of consumer goods.
The movement along the PPF from X to Y would mean an increase in economic growth because capital goods are crucial for increasing production. However, the loss of 15 units of consumer goods would cause current living standards to fall, but it will enable living standards in the future to rise at a faster rate. This is because there would be more capital goods to produce consumer goods which provide satisfaction to consumers.
If a country is located anywhere on their PPF; there is an efficient allocation of resources. However, if a country is located within its PPF; there is an inefficient allocation of resources – not all the resources are being used. At position U the economy can increase the production of both consumer and capital goods without there being any opportunity cost as nothing is given up in return.
SHIFTS IN PRODUCTION POSSIBILITY FRONTIERS
Over time, a country’s production may increase. This would cause an outward shift in the PPF which represents economic growth. Economic growth can occur for multiple reasons:
- An increase in quality/quantity of resources (such as gold/other natural minerals).
- Increase in investment.
- Development of new technology (for example technology for mining materials may improve which makes minerals more accessible?.
However, it is possible for production possibility frontiers to shift inward which may be caused by a natural disaster or war where resources are destroyed.
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