Production Possibilities Frontier

  • Graph that shows the combinations of amounts of two items that could be produced using the same resources

  • All points on the graph are points of efficiency

  • If you don't use all resources, then you have points of underutilization ( or inefficiency)

  • PPF Graph show alternative ways to use resources but does not show the best way because that is a normative issue.

  • Famous "Guns or Butter" Analogy

    • Government could use its resources to produce "guns" or military goods.

    • Government could use its resources to produce "butter" or domestic goods.

    • It highlights the trade-offs an economy faces in using scare resources.

    The production possibilities frontier is the graphical portrayal of the information contained in Table 2elö It shows the combinations of two goods that can be pro- duced if the economy uses all of its resources fully and efficiently Figure 201 is the production possibilities frontier that corresponds to Table 29 Points A through G

    are plotted with gun production measured on the vertical axis and butter produc- tion along the horizontal axiso 25 20 15 10 5 5 20 25 30 15 35 BUTTER 40 Fig. 201 Production Possibilities Frontier The economy has the option of producing any combination of guns and butter along the frontier, At Point B most of the economy's resources are devoted to butter production, Only three guns are produced, At Point F gun production is predomi- nante Still, the economy is using its resources fully and efficiently at both pointso A normative analysis is required to determine which point is preferredo On efficiency grounds all the points along the frontier are equal, Points inside the frontier (Point I) are possible alsoa However, if the economy is operating at a point inside the frontier, resources are not being used fully or effi- cientlye Consider Point I, where 10 pounds of butter and six guns are being pro- duced per yeare By the definition of the production possibilities frontier we know that when the economy produces 10 pounds of butter, 12 guns could be produced if resources were used fully and efficiently (Point E). Point I represents a combina- tion of guns and butter that does not require full or efficient resource utilization, The economy could do better by producing some combination of the two goods that lies on the frontier. Points outside the production possibilities frontier (Point J) are unobtainable. Point J represents a combination of 25 pounds of butter and nine guns per yearo By the def- inition of the production possibilities frontier we know that if 25 pounds of butter are produced, only three guns can be produced (Point B) if resources are used fully and efficiently Therefore, points outside the frontier cannot be attained at this time,

Shift in the Production Porribilities Frontier

  • Points outside the PPF may be attained at some future date because the frontier may shift so that points like J lie along the new frontier.

  • The frontier can also shift inward representing a change for the worse.

  • Factors that cause the PPF to shift:

    • changes in the amount resources in the economy

    • change in technology and productivity

Machine generated alternative text: 臼 G U R E 3 A Shift in the Production Possibilities Frontier A technological advance in the com- puter industry enables the economy to produce more computers for any given number Of cars. As a result ， the production possibilities frontier shifts outward. 巧 the economy mOVeS from poi nt A 忆 point G ， then the pro- duction Of both cars and computers Increases. Quantity of Computers Produced 40 開 乙 3 佣 乙 2 佣 0 A 5 開 650 1 開 Quantity Of Cars Produced

Increasing Opportunity Cost

  • More and more resources are required to produce the same amount of a product

  • Curve for this type of PPF graph will be concave.

    $0 200 300 400 3 Wine 200\*300 -à 15 \*400 Wine 600

Constant Opportunity Cost

  • Same resources are required to produce a certain amount of a product

  • Product Possibilities frontier will be a downward-sloping line.

200 S0da 50 €Ια35 200 so\>A

Opportunity cost and PPF graph

Machine generated alternative text: What is the opp ort unity cost of building 500 more computers ， 丘 om 2000 to 2500 ？ 1000 700 500 0 匚 污 a 00 伍 疒 S 2000 2500 3000 Computers

What is the opportunity cost of building 500 more cars, from 0 to 500? 1000 700 500 cone O cars SOO cad 3 DOO 2500 I —500 2000 2500 3000 Computers

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