MARKETS IN ACTION

CHAPTER 3 Production Possibility (PP) Frontier (PPF)

Production Possibility Curves - PPCs / PPFs (https://www.youtube.com/watch?
v=IzccVWouIxM&list=PLWeicFreBUYCOFC2A0SlKrpEYgwaSF63t&index=3)

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OPPORTUNITY COSTS (OC) [is illustrated in the shape of PPF]

Micro (only 2 Curve represents the maximum possible

specific goods) production of both mobile phones and
cameras. Can’t go beyond the curve.
The curve shows various combo of
mobile phones and cameras that can be
produeces based on the usage of factors
of production (fop)

@A Produces 10 C & 8 Mp
@B  Firm wants to specialise in producing C. Hike in C by 10 units, drop in Mp by 1 unit
 OC of producing 10 extra C is 1 unit of Mp foregone
 Can also be illustrated as marginal cost of 10 more C would be 1 fewer Mp
@C Firm wants to produce 10 more C, move from pt B to C. Reallocation of fop happens when shift along
the curve happens. For the same 10 extra C, have to forego 4 Mp. Greater OC
 Macro (Consumer G&Capital G or
Public Services &Milatary Force). This
Unattainable indicates on entire economy

Inefficiency

Shape of curves
Concave “Law of Increasing OC”
 The more of C [10-20] vs [20-30] produced the more Mp [8-7] vs [7-3]
foregone each time. Giving up more Mp to produce incremental C
 A business as it moves towards heavy specialisation e.g. cameras it means their
fop are more suited for Mp production in PPF
Linear [linear & “Constant OC”
downward slope]  Constant OC as we move along PPF

Convex “Law of Decreasing OC”

 As production of goods in y axis increases, less and less OC of the goods in x
axis
 Fop are more suited to goods in y axis

EFFICIENCY
Productive Efficiency
o Using up all fop to the
maximum level
o No wastage/ unemployment
(any point on the curve)
o @ macro level any point
below the curve will be
unemployment of
labour/capital
Allocative Efficiency (AE)
o If units produced satisfies
consumer demand (dd)
o AE cannot be illustrated in
PPF not knowing the
consumer dd
o If consumer dd is Mp, point
A,B,C above is not at AE
Pareto Efficiency (PE)
o Nobody can be made better
off without making some-
body else worse off
o Any point along the curve is
PE
o From point B to C making
people who likes cameras
better off but who wants
Mp worse off
INCREASING PRODUCTION
2
How to shift from PPF1 to PPF2? Q C E L L

PPF 1 By increasing Quantity & Quality of FOP:

i. Bring in more labour
ii. Retrain labour to increase productivity
PPF 2 iii. Increase no of machinery
iv. Upkeep the machinery/ Upgrade
v. Increase the acreage of Land for agricultural related
business
2
How to shift from PPF2 to PPF1? – ve Q C E L L
i. War can reduce growth (destroy infrastructure)
ii. Run out resources
iii. Failure to invest
iv. Global warming damage world Agriculture

Asymmetric Growth Capital goods are goods which are used

– curve moves to make other consumer goods e.g.
favouring only 1 machinery. Consumer goods which are
goods e.g. MP 3
used to meet the needs and wants e.g.
Player labour expert
food and clothing.
increase

CONSUMPTION VS INVESTMENT
 @ A – If economy produces more capital goods, economy will
grow more[due to the fact more capital goods can be used to
increase the amount of consumer goods] than if allocated
more fop to consumer goods
 Driven by trade off between short & long run
 Short run economy uses fop to produce capital rather
consumer goods
 Standards of living (sol) drop; fop is taken away from private
consumption
 However, in longer run the hike in investment in capital goods
allow more output of consumer goods to be produced.
 Sol hikes up by more than would have if economy had not made
short term sacrifice
 Economic growth is achieved through an increase in real GDP
which is the market value of all goods/services within an
economy.