Thursday, July 12, 2012

Production Possibilities Frontiers

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The Production Possibilities Frontiers (PPF) is a model that shows the various

combinations of two goods the economy is capable of producing. As a result of my graph,

it shows the amount of gold produced by scarifying the amount of diamond will be

produced, or the other way around.

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On the graph, points A, B, C, D are called technologically efficient. These are the

amount of gold and diamond producer is attainable to produce of. Those are the choices.

People have unlimited wants, but the resources are limited, so we have to make choice in

a margin, which is more of this good and less the other good. We call it opportunity cost.

For example, now we want to produce more diamonds, so we put more time on

producing diamond instead of producing gold. Therefore, the point shifts from point B to

point A on the graph. To produce 10 pieces of diamonds instead of pieces of diamonds

and 8 pieces of gold, sacrifices 8 pieces more gold at this point. The opportunity cost was

8 more pieces of gold.

There are a lot of reasons that can shift the PPF outward. For instance,

technologically advantage can lead to produce more of each goods. That’s called a

growth; it may result from additional resources in the society.

A point outside the frontier such as point E is scarcity. A scarcity is the amount

of goods the society is not attainable to produce. At point E, the society is unable to

produce units of diamonds and 16 units of gold at the same time with the limited

resources and technology currently available. On the other hand, point F which is on the

graph and within the frontier is inefficiency. A productive inefficiency is a amount of

goods that the society is attainable to produce without at least one good will be scarify. In

another word, the society can produce more than what it is right now. For example, an

empty rental apartment is a productive inefficiency.

The “bowing out” of the frontier shows the law of increasing opportunity cost.

The rise in the marginal opportunity cost of producing a good as more of that good is

produced. For example, it will take more time to get the tenth pieces of diamonds

compare to the seventh pieces of diamonds. When the resources are found, it gets harder

and harder to find the next one.

The PPF shows what the society is attainable to produce and what not an option is.

It helps us to identify the principle of opportunity cost and the economic growth.

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