Product Possibilities Frontier !

Overview


The Production Possibilities Curve is used to demonstrate oportunity costs, and the tradeoffs between two products when utilizing all resources. Each point on the curve represents a combination of goods and services, with several things assumed. The four major assumptions of this model are full employment and productive efficiency, fixed resources, fixed technology, and two products being made. An important concept to understand is the fixed resources, if resources are limited and unchangeable, then they can only be transferred from one use to another; therefore, the tradeoff from one product to another leads to the calculation of opportunity costs. Since "there's no such thing as a free lunch", the allocation of resources towards one task means that they were taken away from another.

This graph represents the production possibilites frontier product A and B. Each point on the curve (A, B, and C,) represents the maximum output of the two products. Point x, however, represents an attainable yet inefficiant use of rescources. Point Y represents an output not attainable with these resources.
This graph represents the production possibilites frontier product A and B. Each point on the curve (A, B, and C,) represents the maximum output of the two products. Point x, however, represents an attainable yet inefficiant use of rescources. Point Y represents an output not attainable with these resources.

Points on the Curve

This curve has infinite combinations of resource uses between the two products. Each point on the curve represents a maximum output combination of the two products being made with the available resources. At this point, the marginal revenue is equal to the marginal cost, thus making the combinations on the curve productively efficient. The various combinations are picked from by businesses or by society as the most desirable, and thus resources are allocated accordingly. Any point lying inside the curve is symbolic of an inefficient use of resources. A business at this point would most likely be losing money due to wasted resources; this could also signal unemployment or underemployment of labor or other resources. A point lying outside of the production possibilities curve is a combination of resources deemed unattainable at the the current status. With the resources available, a business could not produce products consistantly in this combination. More resources or higher productivity would be needed to reach this point.

Opportunity Costs

external image ppp-incr.gif

Increasing opportunity cost


However when some resources are allocated from one product to another, it may actually cause the opportunity costs to increase. Specialized resources result in increasing opportunity costs, creating the concave curve as you can see above. Different parts of the economy are best utilized for different things. We want to make a product with as little cost as possible, so we can give up as little as possible so we avoid reallocating specialized resources. For example, if the rubber used to make bouncy balls is then also used to make erasers, then the opportunity cost of one more eraser increases to more and more bouncy balls as you increase the number of erasers made.

Constant opportunity costexternal image ppp-const.gif

Sometimes, though, this is not the case. If all the workers in a toy factoryare equally as good at making Barbies as they are GI Joes, then the resources, labor in this case, are interchangeable. This results in a straight line rather than a curve and the opportunity cost remains constant.

Production Possibilities Frontier Shifts


In other cases, the entire production possibilities frontier may shift. When the curve for an economy shifts outward, there has been economic growth. A curve may also shift inward, meaning negative growth, or an economy in recession. There are several factors that may cause the product possibilities curve to shift outward. Technology development can lead to higher efficiency therefore to more economic growth. Also, resoucre availability can increase the output of an economy. worker skills or literacy have an impact on the productivity of an economy. If any of these factors increase, it causes the economy to grow. Other possibilites that would cause the curve to shift would be the level of capital stock, or how much an economy invests in equipment or tools. Natural disasters or other world events, for example like the unrest in the Middle East, can cause supply shocks that influence the possibilities of an economy. Specialization and trade create interdependent relationships and efficiency, thus boosting economies. Lastly, government regulations of products and prices also impact the shift of the product possibilities frontier. If the slope of the curve changes, it is representative of the change in opportunity costs. In the real world, all these aspects play a role in the formation of the production possibilities frontiers for individual businesses, and for economies as a whole. Whereas in individual companies there may only be discrepancies between the amount of 2 specific products, on the whole economy's curve, the decision is made as to the combination of capital and consumer goods.
external image ppf_inc_inv.gif
By Hayley, Michael, and Steve :)

Production Possibilities Frontier in the News!!http://infoweb.newsbank.com/iw-search/we/InfoWeb?p_product=AWNB&


Summay:

In this hard economic time, a company named "Awards Network" aims to keep worker productivity and longevity in tact. Companies have the ability to sign a contract with Awards Network with a goal of increasing their production. If they do so, they can chose from a list of rewards and gifts to give to their employees if they meet certain production standards. When dealing with PPF, worker literacy and skills is a factor that can shift the curve outward (increase). If the workers are motivated to work harder by these incentives, then the company's production should increase without hiring any more employees.

For example, lets say Coca Cola has layoffs and is looking for someway to maximize their total output with their new lean workforce. If they hire "Awards Network," they will have the ability to set standards or goals for specific employees and reward them for their efforts. So, if a sales employee goal was to sell a hundred thousand units of pop and they accomplished the goal, they can go onto the awards network website and order their own gift. Essentiality, the Awards Network company organizes a rewards program for companies with the idea of increasing the companies Production Possibilities Frontier.