The production possibility frontier PPF is a curve that shows all efficient combination of output in an economy when the factors of production have been used efficiently and optimally. (Lipsey et al 355). Assume an economy produces 2 goods (x and y) and technology is fixed and resources are fully utilized.
To produce more units of x means that more resources will be transferred and less output of Y will be produced. The reverse is also true as production of more units of y reduces the production of X units. To produce more units of X may require that labor be increased. This reduces the labor for Y produced. Increasing the production of one good translates to increased ‘sacrifice’ or cost. The opportunity cost of producing X in terms of Y increases with the production of more ‘X’ commodity and consequently lesser units of Y are produced.
The opportunity cost increases as more of ‘X’ or ‘Y’ units are produced because although some resources may be suited for the production of both commodities some may not be efficient. For instance, diverting all laborers in X production to Y production may not yield effective results. To obtain 3 units of Y (1) unit of X is given off.
The production possibilities frontier is based on some assumptions.
- There are two goods or commodities in the economy and it shows the trade offs between them.
- It assumes that common resources are used in the production of the two commodities.
- There is fixed technology. Technological changes could influence the production of one good over the other.
- There is full employment and fixed resources. These assumptions would be more applicable in the short run as opposed to the long run. (Lipsey et al 368).
Production along the curve is termed as efficient. Therefore point d, c and e are efficient points of production operating within the economy’s capacity or at optimal. Production at point (a) is attainable but inefficient. Such combination is less than what the economy is capable of producing. Resources are not optimally utilized and hence the inefficiency. Production at point (b) is attainable given the economy’s capacity.
Land, labor, capital and entrepreneurship are the common or most recognized factors of production. Land entails natural resources that are at times modified and contribute to the production processes. Land varies in terms of its fertility. It is fixed but can be improved or renovated for instance swampy areas. (Lipsey et al 400). Labor or human capital is also an important factor of production. Labor is the human resources or people who work. They include professional engineers or technicians capital includes ‘building machinery and tools.
Labor is human be it effort be it mental or physical capital is man-made goods. People have varying skills and expertise resulting to varying wages and salaries. Labor can be improved through training. Capital is mostly used to refer to ‘financial ability’ but it includes the equipment or machinery that have to be put in place for successful production of goods. Entrepreneurship refers to the risk takers who operate businesses. They receive profits as laborers receive wages.
The PPF is a downward sloping curve due to the principle of increasing costs. (Lipsey et al 370). Increasing the production of X leads to a decline in the production of Y. It is concave to origin.
Production at point (b) can only be possible when the economy experiences growth, which could be due to various factors. Increased supply of resource for instance discovery of oil would increase the supply of natural resources as an increase in population due to migration would increase labor. Improvement in technology could lead to a more efficient and effective means of production that could shift the PPF outwards.
Point (b) lies outside the PPF and the economy needs to increase its efficiency, factor resources or improve on the technology. Similar goods have a downward sloping straight line PPF showing that the opportunity cost between them is constant.
Point (a) shows that some resources are unemployed and thus wasteful. An economy could be operating at this point if some of its resources are lying idle or if the resources are being used inefficiently in production.
Using previously used inefficiently resources efficiently as well as employing previously unemployed resources would also help an economy produce at ‘b’. Operating on the curve means that resources are used effectively to producing along the curve is better for the economy.
Lipsey, Richard and Ragan Christopher. Microeconomics. Toronto, Addison Wesley Longman. Tenth Edition. 2001.p 355-450