Production Possibility Frontiers notes
- Production possibility frontier (PPF) shows maximum possible output combinations
of two goods/services an economy can achieve when all resources are fully and
efficiently employed.
- Flaws of the PPF: assumption all resources are fully and efficiently employed;
impossible to achieve full employment and people always at their full and effective
potential.
- Drawn concave to origin: -
as more of good Y is
produced, more of good X
has to be given up.
- When you allocate
resources to one extreme,
it will diminish returns.
- Output of consumer and capital goods lying inside the PPF (points D+E) occur when
there are unemployed resources or when resources are used inefficiently.
- Combinations beyond the PPF are unattainable. A country would require an increase
in factor of resources (factors of production: CELL), an increase in productivity or an
improvement in technology to reach this combination.
Opportunity cost and the PPF
- If we increase the output of good X, fewer resources are available to produce good Y.
(what you give up)
- Law of diminishing returns: theory that predicts that after some optimal level of
capacity is reached, adding an additional factor of production will result in smaller
increases of output.
o After some optimal level of capacity utilization, the addition of any larger
amounts of a factor will inevitably yield decreased per-unit incremental
returns.
- if the law of diminishing returns holds true then the opportunity cost of expanding
output of X measured in terms of lost units of Y is increasing.
- Production possibility frontier (PPF) shows maximum possible output combinations
of two goods/services an economy can achieve when all resources are fully and
efficiently employed.
- Flaws of the PPF: assumption all resources are fully and efficiently employed;
impossible to achieve full employment and people always at their full and effective
potential.
- Drawn concave to origin: -
as more of good Y is
produced, more of good X
has to be given up.
- When you allocate
resources to one extreme,
it will diminish returns.
- Output of consumer and capital goods lying inside the PPF (points D+E) occur when
there are unemployed resources or when resources are used inefficiently.
- Combinations beyond the PPF are unattainable. A country would require an increase
in factor of resources (factors of production: CELL), an increase in productivity or an
improvement in technology to reach this combination.
Opportunity cost and the PPF
- If we increase the output of good X, fewer resources are available to produce good Y.
(what you give up)
- Law of diminishing returns: theory that predicts that after some optimal level of
capacity is reached, adding an additional factor of production will result in smaller
increases of output.
o After some optimal level of capacity utilization, the addition of any larger
amounts of a factor will inevitably yield decreased per-unit incremental
returns.
- if the law of diminishing returns holds true then the opportunity cost of expanding
output of X measured in terms of lost units of Y is increasing.
