Production Possibilty Frontiers Flashcards
What does the PPF show us?
PPF shows four useful concepts.
The combinations of what can be produced with given factors of production.
The productive efficiency of the firm (how efficiently the factors of production are being used).
Opportunity costs in production
The difference between shifts and movements.
The Production Possibility Frontier
PPF shows the combinations of what can be produced with given resources.
PPF - What can be produced?
In reality, firms can produce many things. However, we are going to assume that firms can produce 2 different products. A firms Production Possibility Frontier graph shows its two products.
What does Productively Efficient PPF look like?
The PPF shows us the combinations of what is possible to produce.
The line shows us the most that can be produced with given resources.
If we are on the line, then we are productively efficient.
Can you go past the PPF Line?
It is not possible to produce beyond the line. This is because factors of production are unable to produce any much X and Y than they are able to.
Why are PPF curved?
PPF are curved and not straight lines.
This is because of diminishing returns.
What this briefly means is that the more we use something, the less useful it becomes.
Conversely, the more we produce computers, the less productive our factors of production become because of the law of diminishing returns.
This means that the trade off between producing food or computers is not constant.
How does PPF show opportunity cost?
If we are being productively efficient (on the PPF line) then to make more we have of one good we have to make less of the other (trade off).
If we are producing at point 150Y and 100x and I wish to increase Y to 180, I would have to decrease X to 50.
The reason why we have to sacrifice (trade off) X to make more Y is that my given factors of production can’t produce any more than the PPF line.
Therefore, to produce more Y I will have switch some of the factors that make to making Y.
To get the opportunity cost, we need to find the value of what we sacrifice.
Is there opportunity cost inside the PPF curve?
If we are producing within the PPF, then there does not necessarily have to be a trade off and so the opportunity cost can be zero.
If we are operating at X, we could move to A so that more wine is being produced but we lose no cotton.
How Does Business Grow?
The reason business grows is because it acquires new factors of production, or improves the productivity of its own.
What shifts PPF?
Greater quantity of the factors of production will allow firms to produce more of both goods.
The quality of the factors of production will also change the productive potential of a firm.
Conversely, the reverse can happen. Factors can become less effective and will refer reduce the productive potential.
Will shifts in PPF be parallel?
If we increase the quantity or quality of the factors of production and these increases are equally effective at producing both goods, then the shift is parallel.
However, if the factors of production can only make one good (consumption goods) but not the other (capital goods) then we can increase the production of one good but not the other.
This means that the shift is only on one side of the PPF.
