Production Possibility Frontier - A-Level Economics
Sustainability
Sustainable Resources-‐ renewable resources which are being economically exploited in a way which ensures that they will not run out, and will therefore be available for future generations.
Sustainable Development-‐ development which meets the needs of the present without compromising the ability of future generations to meet their own needs.
Renewable & Non-Renewable Resources
- Renewable resources are natural resources whose stock level can be maintained over a period of time. Examples include water, soil, wind power and solar energy.
These resources may decline over time if they are consumed at a faster rate than at which the environment can replenish them. Therefore, careful management is required to stop activities such as deforestation or soil erosion.
- Non-‐ renewable resources are resources whose stock level decreases over time as they are consumed. Examples include fossil fuels (e.g. coal, oil, gas) and commodities such as steel.
These resources have to be managed sustainably because unsustainable management can lead to the rapid exhaustion. The price mechanism plays a part in reducing the rate of consumption via higher prices, whilst recycling and the use of substitutes is also important.
Production Possibility Frontier
Production Possibility Frontier (PPF)
A Production Possibility Frontier (PPF) is a curve showing the maximum combinations of two goods or services that can be produced in a given period with available resources used at maximum efficiency.
An economy cannot be on a point outside the curve because this exceeds maximum efficiency. However, an economy can be inside the curve if it is not using all of its resources to the maximum (e.g. during a recession).
As you move along the PPF curve, an opportunity cost is always incurred.
Concave and Straight Line PPF Curves
The PPF curve is concave shape due to diminishing marginal returns-‐ all factor inputs are not equally suited to producing different goods and services.
A straight line PPF shows that factor inputs are interchangeable-‐ they are adapted to produce both goods, and can switch from one to another. A straight line PPF also means there is a constant opportunity cost between the two goods.
In the PPF curve here, an economy is split between producing wine and cotton. If it moves from B to C, resources are diverted away from wine production to cotton production, which results in a fall of wine produced. This fall is the opportunity cost of moving along the PPF curve from B to C.
A common PPF shows the balance between production of capital and consumer goods. For such cases, remember that capital goods are key for increasing production, whilst consumer goods are key for improving quality of life.
The economy cannot be at point Y with its current resources.
Allocation of Resources & PPF
If an economy is located on any point on the curve, there is an efficient allocation of resources
because none are being wasted.
If an economy is located within its PPF, there is an inefficient allocation of resources since not all are being used (i.e. some are wasted).
Economic Growth & Shifts in PPF
Economic growth is an expansion in the productive capacity of an economy.
Economic growth occurs when the PPF curve shifts outwards. Here, new technology for example may have caused a new potential output.
When the PPF curve shifts inwards, there is a shrink in an economy’s productive capacity-‐ this is negative economic growth. A natural disaster or a war may cause this because it would destroy resources.
Economic growth tends to happen for two main reasons:
- Increase in the quantity of factors of production (e.g. farming-‐ more land)
- Increase in quality of factors of production (e.g. farming-‐ better technology)
For example, an improvement healthcare would shift the PPF curve outwards because it makes the workforce more productive (increase in quality of resources). It would also reduce the number of sick days and lead to longer working lives, both of which increase the supply of labour (increase in quantity of resources).
A PPF is a graphical representation of the maximum amount of goods and services that an economy can produce using its resources efficiently.
The slope of the PPF represents the opportunity cost of producing one good in terms of the other good.
A straight-line PPF represents constant opportunity costs between two goods, while a bowed-out PPF represents increasing opportunity costs as more of one good is produced.
A PPF can shift outward if there is an increase in the quantity or quality of resources, an improvement in technology, or an increase in trade.
A feasible point is any point on or inside the PPF, while an efficient point is a point on the PPF where all resources are used in the best possible way.
A change in demand can affect the PPF by influencing the types of goods produced and the resources allocated towards producing those goods.
Businesses can use the PPF to analyze the trade-offs between different production options and identify the most efficient use of their resources to maximize their profits.
The PPF represents the opportunity cost of producing one good in terms of the other good. The opportunity cost of producing a good increases as more of that good is produced, leading to a bowed-out PPF.
Economic growth can be illustrated by an outward shift of the PPF, indicating an increase in the maximum amount of goods and services that an economy can produce with its resources.
The PPF can be used to analyze international trade by comparing the opportunity costs of producing a good domestically versus importing it from another country. Countries can specialize in producing goods with lower opportunity costs and trade with other countries to obtain goods with higher opportunity costs.
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