This is a revision presentation on aspects of the production possibility frontier

1. The Production Possibility Frontier

2. Applying the PPF concept
• Opportunity cost
• Gains from specialisation and trade
• Showing economic growth
Some topical issues:
1. Economic effects of natural disasters
2. The collapse of fish stocks / deforestation
3. Debate over investment in fracking
4. Economics of labour migration

5. Production Possibility Frontiers (PPF)
• We normally draw a PPF as
concave to the origin i.e.
when we move down along
the PPF, as more resources
are allocated towards Good Y
the extra output gets smaller
• This is explained by the law of
diminishing marginal returns,
it occurs because not all
factor inputs are equally
suited to producing items
leading to lower productivity
A PPF shows the output combinations of two goods or services
attainable when all resources are fully and efficiently employed
A
B
C
Output
of
Good X
Output of Good Y
X1
X2
X3
Y1 Y2 Y3

6. Production Possibility Frontier (PPF)
Output of
Pizza
Output of Sugar
A
B
A, B and C are
all efficient
output
combinations
as they lie on
the existing
PPF
C
D
E
F
D and E are
inefficient
combinations – i.e.
not all resources
fully utilized
F is an output
combination
that is not yet
attainable as it
lies beyond
the PPF

7. The PPF and Economic Efficiency
• Combinations of the output of consumer and capital goods lying
inside the PPF happen when there are unemployed resources or
when resources are used inefficiently. We could increase total
output of goods and services by moving towards the PPF
• Combinations of goods and services that lie beyond the PPF are
unattainable at the moment
• A country would require an increase in factor resources, an
increase in productivity and/or an improvement in technology to
achieve an outward shift of the PPF
• Trade between countries also allows nations to consume beyond
their own PPF potentially leading to gains in economic welfare
• Producing more of both goods with the same resources
represents an improvement in welfare and a gain in allocative
efficiency

8. The PPF and Opportunity Cost
Output of
Wheat
Output of Cotton
200
160
300 400
A
B
The opportunity cost of
employing more resources
into cotton production is
expressed in terms of the
output of wheat given up
One hundred extra
tonnes of cotton
involves sacrificing 40
tonnes of wheat – the
opportunity cost is
4/10ths of a tonne of
wheat for each extra
tonne of cotton
Examiners are keen that you understand the
concept of opportunity cost in relation to the PPF!

9. PPF, Diminishing Returns and Opportunity Cost
Output of
Wheat
Output of Cotton
200
160
300 400
A
B
With diminishing returns,
the marginal (extra) output
of cotton diminishes as
more factor resources are
allocated to it.
C
80
480
The result is that the opportunity
cost measured in lost wheat output
increases
To be productively
efficient, an
economy must be
on its production
possibility frontier

10. Drawing a Linear Production Possibility Frontier
Output of
consumer
goods
Output of capital goods
PPF1
Movements along a PPF require a reallocation of factor resources
90
60
30
10 25 40
If the production possibility frontier is a straight
line, then the marginal opportunity cost of
switching resources between consumer and
capital goods is constant.
For example, the marginal
opportunity cost of producing an
extra 15 capital goods is 30
consumer goods i.e. the
opportunity cost is 2 consumer
goods per extra capital good

11. Outward Shift in the Production Possibility Frontier
Output of
consumer
goods
Output of capital goods
PPF1 PPF2
Changes in production technology can cause the PPF to shift outwards – this
leads to an increase in a country’s potential output
60
25 42
An improvement in the technology available to
produce capital goods (other factors held
constant) will lead to an outward shift in the
production possibility frontier.
After the shift in the PPF
more capital goods can be
produced for each level of
output of consumer goods

12. Causes of Shifts in the Production Possibility Frontier
Cause of an outward shift in the
Production Possibility Frontier
Brief comment on the cause of
the shift in the PPF
• Higher productivity / efficiency
of factor inputs
This increases the output per unit
of input used in production
• Better management of factor
inputs
Improved management reduces
waste and improves quality
• Increase in the stock of capital
and labour supply
e.g. from inward labour migration
/ capital investment
• Innovation and invention of
new products and resources
Improved production processes
helps to boost efficiency
• Discovery / extraction of new
natural resources (land)
Discovery of commercially viable
land inputs drives extraction

13. Can the Production Possibility Frontier shift inwards?
Yes – productive potential can contract – here are some causes
Damaging effects of natural
disasters such as drought, a
tsunami, an earthquake and
severe floods
Destruction / loss of factor inputs
caused by civil war and other
forms of conflict that last for
many years
Large scale net outward labour
migration e.g. due to an
economic depression that leads
to a brain drain of skilled workers
A trend decline in the
productivity of inputs perhaps
caused by a persistent recession
which causes net investment to
be negative
Causes of an
inward shift of the
a nation’s PPF

14. A magnitude-7.8 earthquake struck Nepal during April,
killing as many as 10,000 people and causing catastrophic
damage throughout Nepal, India, China, and Bangladesh.
Preliminary economic losses were expected to reach and
possibly exceed USD5.0 billion – which would equal to at
least 25 percent of Nepal's gross domestic product (GDP)
– with very low insurance penetration in the region.
Government figures revealed that more than 700,000
homes and other structures were damaged or destroyed by
the earthquake, as well as dozens of historical sites

15. Can the Production Possibility Frontier shift inwards?
Yes – productive potential can contract – here are some causes
Damaging effects of natural
disasters such as drought, a
tsunami, an earthquake and
severe floods
Destruction / loss of factor inputs
caused by civil war and other
forms of conflict that last for
many years
Large scale net outward labour
migration e.g. due to an
economic depression that leads
to a brain drain of skilled workers
A trend decline in the
productivity of inputs perhaps
caused by a persistent recession
which causes net investment to
be negative
Causes of an
inward shift of the
a nation’s PPF

16. Can the Production Possibility Frontier shift inwards?
Yes – productive potential can contract – here are some causes
Damaging effects of natural
disasters such as drought, a
tsunami, an earthquake and
severe floods
Destruction / loss of factor inputs
caused by civil war and other
forms of conflict that last for
many years
Large scale net outward labour
migration e.g. due to an
economic depression that leads
to a brain drain of skilled workers
A trend decline in the
productivity of inputs perhaps
caused by a persistent recession
which causes net investment to
be negative
Causes of an
inward shift of the
a nation’s PPF

17. Can the Production Possibility Frontier shift inwards?
Yes – productive potential can contract – here are some causes
Damaging effects of natural
disasters such as drought, a
tsunami, an earthquake and
severe floods
Destruction / loss of factor inputs
caused by civil war and other
forms of conflict that last for
many years
Large scale net outward labour
migration e.g. due to an
economic depression that leads
to a brain drain of skilled workers
A trend decline in the
productivity of inputs perhaps
caused by a persistent recession
which causes net investment to
be negative
Causes of an
inward shift of the
a nation’s PPF

18. Can the Production Possibility Frontier shift inwards?
Yes – productive potential can contract – here are some causes
Damaging effects of natural
disasters such as drought, a
tsunami, an earthquake and
severe floods
Destruction / loss of factor inputs
caused by civil war and other
forms of conflict that last for
many years
Large scale net outward labour
migration e.g. due to an
economic depression that leads
to a brain drain of skilled workers
A trend decline in the
productivity of inputs perhaps
caused by a persistent recession
which causes net investment to
be negative
Causes of an
inward shift of the
a nation’s PPF

19. The Production Possibility Frontier