Production possibility frontiers and economic efficiency.
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production possibility frontiers and economic efficiency Introduction The Production Possibilities Frontier (PPF) shows the maximal combinations of two goods that can be produced during a specific time period given fixed resources and technology and making full and efficiency use of available factor resources. A PPF is normally drawn as concave to the origin because the extra output resulting from allocating more resources to one particular good may fall. This is known as the law of diminishing returns and can occur because factor resources are not perfectly mobile between different uses, for example, re-allocating capital and labour resources from one industry to another may require re-training, added to a cost in terms of time and also the financial cost of moving resources to their new use.
(b) More factor resources are exploited (perhaps due to an increase in the available workforce or a rise in the amount of capital equipment available for businesses to use) In our example illustrated in the second diagram below we see the effects of a change in the state of technology in supplying MP3 players which causes an outward shift in the PPF. With the same resources allocated to DVD players, a greater output of MP3 players is possible. The real cost of MP3 players will fall - there has been a change in the opportunity cost The PPF and Economic Efficiency An efficient production point represents the maximum combination of outputs given resources and technology - clearly the PPF is a useful way of illustrating this idea Allocative efficiency An economy achieves allocative efficiency if it manages to produce the combination of goods and services that people actually want.
Productive efficiency requires minimizing the opportunity cost for a given value of output. When there is an outward shift of the PPF perhaps due to improvements in productivity or advances in the state of technology, then the opportunity cost of production falls and society can now produce more from given resources. Distributive efficiency We achieve distributive efficiency if we get the goods and services produced to those who actually want or need them. Where we are on the production possibility frontier has little real bearing on distributive efficiency, we tend to use the concept to make comment on allocative and productive efficiency. But when an economy achieves economic growth leading to an outward shift in the PPF, economists have concerns over the distribution of gains in output and whether or not an improvement in average living standards has benefited the majority of consumers or whether there has been an increase in inequality and relative poverty
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