• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Production Possibility Frontier (PPF)

Extracts from this document...

Introduction

ECONOMICS ESSAY ON PRODUCTION POSSIBILITY FRONTIER The starting point in economics is to measure what we can produce. Everyone's endless desires cannot be fulfilled due to limited resources, so there is a limit to what our economy can actually produce. This can be analyzed by what is called the PPF or Production Possibility Frontier. Where Do We Start? We generally begin economics by discussing scarcity. Everything in economics boils down to the constant scarcity that exists. In an economy, there are always limited resources as opposed to the unlimited human desires. In other words, at every point of time in an economy, there is scarcity. Thus it is very important the measure what our economy can produce at the end of the day. What an economy is capable of measuring is shown on a PPF or Production Possibility Frontier curve. What is PPF? There are a thousand ways of defining this simple three letter term, but it is necessary to understand how these complicated definitions are derived. If taken literally, the word PPF arises from three words: - Production- output of goods and services by adding utility to it - Possibility- the maximum attainable amount - Frontier- border or boundary If combined, we can attain the following definition of PPF: A curve showing the boundary of what can be produced in an economy when the factors of production are used to their fullest potential. ...read more.

Middle

For example, at point A FA of food and CA of computers can be produced. Or the resources could be allocated differently such that it could produce FB of food and CB of computers at point Y. all the points on the frontier such as A and B are productively efficient as the available resources are used to full utility without being wasted. When an economy is productively efficient, it can only produce more of one product by producing less of another; resources have to be shifted form one product to another. Thus, a company will have an opportunity cost. For example, if x of food is produced, then the opportunity cost of the economy is y units of computers. Let's look at another example. Consider an economy that can only produce only wine and cotton. According to the PPF, point A, B and C on the curve represent the most efficient use of resources in the economy. Point X represents inefficient use of resources, while point Y represents the goals that the economy cannot achieve due to present inadequate resources. The finance minister of that country wants more production of wine in that country. For that, the country will have to give up some of its resources used for producing cotton (Point A). if the economy wants to produce more cotton (points B and C), it would have to divert the resources from making wine, to making cotton, and will produce less wine than it would produce at point A. ...read more.

Conclusion

3) PPF shows the combination of only two goods, but it actually can be taken as a representation of a large variety of goods. Example: Points in the curve: Points C, A and B represent the production of vehicles and computers using all the available resources to the optimum potential. Points lying inside the PPF curve (example point X) occur when the economy is not making efficient resources available (there are "unemployed resources"). We could increase the output of goods by aiming to reach points A, B or C. Points lying outside the curve (example point D) are currently unattainable. We need to increase our total resources and improve technology to reach this point. PPF Assumptions - no change in technology - resources are fixed - input endowments given - all production resources are fully employed - time is given - constant supply of raw materials - prices of all commodities stay the same PPF and Opportunity Cost The slope of the PPF measures the marginal opportunity cost of producing one good when another is sacrificed. Importance of PPF PPF is useful in questions about 1) Efficiency 2) Equity 3) Tax 4) Transfer Policy 5) Composition of Output 6) Growth and Productivity It also helps us determine and understand opportunity cost, choice and scarcity (scarce resources). Quick- Quiz Lets look at this graph again. Which do you think will be the best economy from point A, B and C? Answer- point A, because it represents equal allocation of resources due to which production will be maximum. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our International Baccalaureate Economics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related International Baccalaureate Economics essays

  1. Extended Essay

    It was a huge opportunity cost for the government. We can see the amount of subsidy is between in the marked area. This subsidy system did not support the reduction of one-sided energy dependence, instead of supporting the gas; the government should subsidise green energy or other energy types to reduce the one-sided energy dependence.

  2. Old IB Questions

    small fraction of the total output of the industry so it cannot influence price. Although the brands of taxis can be different, they do the same job to serve the society. There is no consumer preference of taxis. In other words, in the taxi industry there is no differentiation of products (services).

  1. economics extended essay

    The diagram below shows us the average expenditure made by a consumer at the mall or the local retail stores. By analyzing the graph, one can see that costumers who spend more on a single visit tend to purchase their products at the mall, whereas the people who spend less

  2. What is scarcity?

    A third way is to use the mixed economy made up of some private and some public ownership of resources as well as regulated and unregulated markets. These three different market economies vary across different countries, economies, and historical times.

  1. Allocation of Resources

    Provide that good X and Y are substitutes, if the demand for good X increases, the demand for good Y decreases - so the demand curve of good X would shift to the right, causing the price to increase, and the demand curve of good Y would shift to the left, causing the price to decrease.

  2. The structure of the EU budget and its allocation

    � Emergency Aid Reserve EUR 249 million both in commitment and payment appropriations. � Provisional appropriations of EUR 537 million in commitment appropriations and EUR 410 million in payment appropriations. The above table shows the full implementation of all available appropriations including amounts carried over from 2009 into 2010 and assigned revenue.

  1. Is there possibilities of war for resources?

    The largest population increase is projected to occur in Asia, particularly in China, India and Southeast Asia, accounting for about 60% and more of the world?s population by 2050 (UN Population Division, 2007). The rate of population growth, however, is still relatively high in Central America, and highest in Central and part of Western Africa.

  2. What new possibilities do developments in technology provide for families?

    Vavra, a cosmetics industry executive in Manhattan, looked up from her iPad, where she was catching up on the latest spring looks at Refinery29.com, and noticed that her husband, Michael Combs, was transfixed, streaming the N.C.A.A. men?s basketball tournament on his laptop.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work