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Production possibility fronteir econ paper - Essay Example

The production possibility frontier [PPF] (also called the production possibilities curve [PPC] or the transformations curve) is a device used in macroeconomics as a means of measuring the maximal possibility of production of any one good or product in comparison with another, assuming all of its scarce resources are fully and efficiently employed. The PPF is shown in graphical form, in which the two products being compared make up the two axes. The line in which maximal efficiency is acheived is what is known as the PPF. Any point along this line shows maximum efficiency of production levels in different combinations of the two products. Unless both of the products in question are homogenous – in which case a linear graph is output – the PPF is generally of a concave, curved line. A diagram of an average looking PPF can be seen below.

The concave shape is very important factor when considering the PPF. Because the PPF is the line in which an economy is at its maximal production potential, it is imposible to increase production output of one product, without sacrificing the production levels of the other. In other words – there will always be an increasing oppertunity cost – this is an economical fact. This is where the importance of a concave PPF is apparant – it correctly depicts the principal of marginal oppertunity cost. This can be seen clearly in the production possibility frontier below.

As seen in the production possibility frontier above, as the economy hightened production levels for product B (moving from point A, to point B, before finally moving to point C), they faced an oppertunity cost in the production levels of product A – at an increasing rate. In other words, they experienced a marginal oppertunity cost. Had the PPF been linear, rather than curved, it would not have portrayed this correctly. Rather, it would have wrongfully conveyed that hightened production of one product would exhibit an oppertunity cost at fixed rate for the other product in comparison.

The PPF is drawn under the assumption that the economy is running at full economical efficiency, exploiting all of its scarce resources. Points A-E on the PPF shown in figure 3 demonstrate five different states at which an economy could theoretically be producing its goods. Points A-C are all perfectally feasable and desirable economical production states. All three points reside on the PPF, showing maximal efficiency in production levels. They differ only in the ratios in which the two products are produced. Point D is also acheivable with the current PPF. However, it is not desirable, as it indicates the economy is under-acheiving, and not meeting its maximum efficiency – hence stunting any future economic growth.

On the other hand, point E – while desirable – is impossible to reach. This is because, by definition, the PPF represents the maximum production potential. This only applies to, however, the PPF which depicts the current state of the economy with the current magnitude of scarce resources available to it. Future economical growth, makes point E a possibility. How, then, is economical growth possible, if the PPF describes the outmost maximum potential output of the economy? This is by raising the maximum potential of the economy, which can be acheived in couple of ways. For example, through an increase in the quality or quantity of the produced goods – making more of or more productive versions of a good, using the same amount of resources.

The growth in the economy is shown by a outward shift of the PPF, as shown in figure 4 below – where PPF2 illustrates the new boundary of maximum efficiency for the economy. However, the production possibility fronteir is merely a means of measuring the possibilities of an economy. By itself, it gives no indication of what combinations will eventually be applied in the economy in question. It is certainly and important and efficient means of measuring oppertunity cost as well as other principals considering economics, and is an even more powerful when made usw of with other economic tools.