Production possibility Diagrams Flashcards
What is a possibility production frontier?
Also known as a Production possibility curve is a graphical representation that illustrates the maximum output of two goods or services that an economy can produce given its resources and a fixed level of technology.
Features of a Production Possibility Frontier?
Scarcity: The PPF demonstrates the concept of scarcity, which
refers to the limited availability of resources (such as labour,
capital, and land) in relation to the unlimited (and often
growing) wants and needs of a society.
Trade-offs: The PPF reflects the idea that an economy must
make trade-offs when allocating its resources. Producing more
of one good necessitates producing less of another. The shape
of the PPF highlights the trade-offs required when reallocating
resources between the two goods.
Opportunity Costs: The opportunity cost of producing more of
one good is the amount of the other good that must be given
up. The slope of the PPF represents the opportunity cost of
switching from producing one good to producing the other.
Efficiency: Points along the PPF represent an efficient use of
resources, where the economy is fully utilising all available
resources to produce goods and services. Points inside the PPF
are inefficient, indicating that resources are not fully
employed.
Constraints and Growth: The PPF can shift outward or inward
based on changes in the availability of resources, technological
advancements, or improvements in productivity. An outward
shift of the PPF indicates economic growth.
Assumptions: The PPF diagram makes several assumptions,
such as fixed resources, a given level of technology, and full
resource utilisation. These assumptions may not always hold.
When will a PPF shift outwards?
A Production Possibility Frontier (PPF) shifts outward when
there is an increase in an economy’s potential to produce
goods and services.
This outward shift represents economic growth, which allows
the economy to produce more of both goods or to improve its
production capabilities.
Explaining an outward shift of a PPF?
Increase in natural resources
Technological advancements
Human capital Development
Investment in capital
