The production possibility frontier PPF is a curve that shows all efficient combination of end product in an economic system when the factors of production have been used expeditiously and optimally. ( Lipsey et al 355 ) . Assume an economic system produces 2 goods ( ten and Y ) and engineering is fixed and resources are to the full utilised.
To bring forth more units of ten means that more resources will be transferred and less end product of Y will be produced. The contrary is besides true as production of more units of Y reduces the production of X units. To bring forth more units of X may necessitate that labour be increased. This reduces the labour for Y produced. Increasing the production of one good translates to increased ‘sacrifice’ or cost. The chance cost of bring forthing X in footings of Y additions with the production of more ‘X’ trade good and accordingly lesser units of Y are produced.
The chance cost additions as more of ‘X’ or ‘Y’ units are produced because although some resources may be suited for the production of both trade goods some may non be efficient. For case. deviating all labourers in X production to Y production may non give effectual consequences. To obtain 3 units of Y ( 1 ) unit of X is given off.
The production possibilities frontier is based on some premises.
- There are two goods or trade goods in the economic system and it shows the trade offs between them.
- It assumes that common resources are used in the production of the two trade goods.
- There is fixed engineering. Technological alterations could act upon the production of one good over the other.
- There is full employment and fixed resources. These premises would be more applicable in the short tally as opposed to the long tally. ( Lipsey et al 368 ) .
Production along the curve is termed as efficient. Therefore point d. degree Celsius and vitamin E are efficient points of production operating within the economy’s capacity or at optimum. Production at point ( a ) is come-at-able but inefficient. Such combination is less than what the economic system is capable of bring forthing. Resources are non optimally utilised and therefore the inefficiency. Production at point ( B ) is come-at-able given the economy’s capacity.
Land. labour. capital and entrepreneurship are the common or most accepted factors of production. Land entails natural resources that are at times modified and lend to the production processes. Land varies in footings of its birthrate. It is fixed but can be improved or renovated for case boggy countries. ( Lipsey et al 400 ) . Labor or human capital is besides an of import factor of production. Labor is the human resources or people who work. They include professional applied scientists or technicians capital includes ‘building machinery and tools.
Labor is human be it attempt be it mental or physical capital is semisynthetic goods. Peoples have changing accomplishments and expertness ensuing to changing rewards and wages. Labor can be improved through preparation. Capital is largely used to mention to ‘financial ability’ but it includes the equipment or machinery that have to be put in topographic point for successful production of goods. Entrepreneurship refers to the hazard takers who operate concerns. They receive net incomes as labourers receive rewards.
The PPF is a downward sloping curve due to the rule of increasing costs. ( Lipsey et al 370 ) . Increasing the production of X leads to a diminution in the production of Y. It is concave to origin.
Production at point ( b ) can merely be possible when the economic system experiences growing. which could be due to assorted factors. Increased supply of resource for case find of oil would increase the supply of natural resources as an addition in population due to migration would increase labour. Improvement in engineering could take to a more efficient and effectual agencies of production that could switch the PPF outwards.
Point ( B ) lies outside the PPF and the economic system needs to increase its efficiency. factor resources or better on the engineering. Similar goods have a downward sloping consecutive line PPF screening that the chance cost between them is changeless.
Point ( a ) shows that some resources are unemployed and therefore uneconomical. An economic system could be runing at this point if some of its resources are lying idle or if the resources are being used inefficiently in production.
Using antecedently used inefficiently resources expeditiously every bit good as using antecedently unemployed resources would besides assist an economic system green goods at ‘b’ . Operating on the curve means that resources are used efficaciously to bring forthing along the curve is better for the economic system.
Lipsey. Richard and Ragan Christopher. Microeconomics. Toronto. Addison Wesley Longman. Tenth Edition. 2001. p 355-450