Economics Basics Production and possibility frontier
Introduction
What Is Economics
Scarcity
Macro and Microeconomics
Production Possibility Frontier (PPF)

Opportunity Cost
Specialization and Comparative Advantage
Absolute Advantage
Demand and Supply
The Law of Demand
The Law of Supply
Time and Supply
Supply and Demand Relationship
Equilibrium
Disequilibrium
F. Shifts vs. Movement
Elasticity
The availability of substitutes
Income available to spend on the good
Time
Income Elasticity of Demand
Utility
Monopolies
Oligopolies
Perfect Competition
Conclusion

 

 

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Under the field of macroeconomics, the production possibility frontier (PPF) represents the point at which an economy is most efficiently producing its goods and services and, therefore, allocating its resources in the best way possible. If

the economy is not producing the quantities indicated by the PPF, resources are being managed inefficiently and the production of society will dwindle. The production possibility frontier shows there are limits to production, so an

economy, to achieve efficiency, must decide what combination of goods and services can be produced.

 

Let's turn to the chart below. Imagine an economy that can produce only wine

and cotton. According to the PPF, points A, B and C - all appearing on the curve

- represent the most efficient use of resources by the economy. Point X

represents an inefficient use of resources, while point Y represents the goals that the economy cannot attain with its present levels of resources.

 

As we can see, in order for this economy to produce more wine, it must give up

some of the resources it uses to produce cotton (point A). If the economy starts producing more cotton (represented by points B and C), it would have to divert resources from making wine and, consequently, it will produce less wine than it is producing at point A. As the chart shows, by moving production from point A to B, the economy must decrease wine production by a small amount in comparison to the increase in cotton output. However, if the economy moves from point B to C, wine output will be significantly reduced while the increase in cotton will be quite small. Keep in mind that A, B, and C all represent the most efficient allocation of resources for the economy; the nation must decide how to achieve the PPF and which combination to use. If more wine is in demand, the cost of increasing its output is proportional to the cost of decreasing cotton production.

 

Point X means that the country's resources are not being used efficiently or,

more specifically, that the country is not producing enough cotton or wine given the potential of its resources. Point Y, as we mentioned above, represents an

output level that is currently unreachable by this economy. However, if there was

a change in technology while the level of land, labor and capital remained the same, the time required to pick cotton and grapes would be reduced. Output

would increase, and the PPF would be pushed outwards. A new curve, on which

Y would appear, would represent the new efficient allocation of resources.

 

When the PPF shifts outwards, we know there is growth in an economy.

Alternatively, when the PPF shifts inwards it indicates that the economy is shrinking as a result of a decline in its most efficient allocation of resources and optimal production capability. A shrinking economy could be a result of a decrease in supplies or a deficiency in technology.

 

An economy can be producing on the PPF curve only in theory. In reality, economies constantly struggle to reach an optimal production capacity. And because scarcity forces an economy to forgo one choice for another, the slope of the PPF will always be negative; if production of product A increases

then production of product B will have to decrease accordingly.

 

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