In reality, this scenario is uncommon and the PPF is more often shown as an outward bending curve. A variety of factors can shift a nation's PPF outward or inward. Macroeconomic factors , such as high unemployment or rising inflation, could cause an inward shift in the PPF. On the other hand, the PPF could shift outward due to a number of factors. An increase in highly trained workers, improved technology, and greater access to capital to fund growth are examples of factors that could promote an outward PPF shift.
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Develop and improve products. List of Partners vendors. Your Money. Personal Finance. Your Practice. Popular Courses. Economy Economics. Table of Contents Expand. Production Possibility Frontier. How the PPF Works. Interpreting the PPF. PPF on a National Scale.
PPF and the Pareto Efficiency. Example of PPF. Key Takeaways In business analysis, the production possibility frontier PPF is a curve illustrating the varying amounts of two products that can be produced when both depend on the same finite resources.
The PPF demonstrates that the production of one commodity may increase only if the production of the other commodity decreases. The PPF is a decision-making tool for managers deciding on the optimum product mix for the company.
Compare Accounts. First, ALL costs in economics are opportunity costs. Economists always mean "opportunity costs" whenever they use the term "cost". Opportunity costs measure what you "give up" when you make a decision. Answer: 1W. If we are producing 16W than we can't produce any Robots 16W and 0R. When we produce our first Robot, Wheat production drops from 16W to 15 W. So the first Robot costs 1W. When we produce our second Robot, Wheat production drops from 15W to 13 W. So the second Robot costs 2W.
The first two Robots together cost 3W. Answer: 3W If we are producing 2R then we can produce 13W. When we produce our third Robot, Wheat production drops from 13W to 10 W. So the second Robot costs 3W.
We call this shape "concave to the origin". Why is the law of increasing costs true? Why is the PPC concave to the origin bowed out? Why does it cost more to produce the second Robot than to produce the first assuming that the Robots are identical? The first robot cost 1W. The Second Robot cost 2W. Why is the law of increasing cost true? The rationale is quite simple. Not all resources are the same. When we decide to produce the first Robot, we take the best engineers from the wheat fields and put them in the robot factory.
Since these engineers are very good at producing Robots we don't need very many of them and Wheat production goes down only a little we lose only 1W. When we decide to produce the second Robot we need to shift more engineers from the wheat fields, but now all the best engineers are already in the robot factories and we need to take the second-best engineers, and MORE OF THEM, to produce just one more Robot.
So Wheat production goes down more than when we produced the first Robot. If we are producing 4R and 10 W, all of our best farmers are in the wheat fields. So when you're going from Scenario A to Scenario B you're not changing the amount of time you're sleeping. You're not changing somehow the geography where you are in a dramatic way. You're not changing the tools you use or the technology. Everything else is equal. The only variable you're changing is how much time you allocate to finding rabbits versus finding berries.
So let's do some more scenarios assuming ceteris paribus. So let me do Scenario C. You could, on average, have enough time to get 3 rabbits. But if you get 3 rabbits then all of a sudden you will to get-- or if you're only getting 3 rabbits, you're now able to get berries. And let's do a couple more. I'm going to do two more scenarios. So let's say Scenario D, if you reduce the amount of time you spend getting rabbits so you get 2 rabbits, now all of a sudden you have enough time on average to get berries.
And then, let's say you spend even less time hunting for rabbits, on average. Then you have even more time for berries.
And so you're able to get to berries and I'll do one more scenario here. So let's say Scenario F-- and let's call these the scenarios.
Scenarios A through F. So Scenario F is you spend all your time looking for berries. In which case, on average, you're going to be able to get berries a day. But since you have no time for rabbits you aren't going to get any rabbits.
So what I want to do is plot these. And on one axis I'll have the number of rabbits. And on the other axis I'll have the number of berries.
So let me do it right over here. So this axis, I will call this my rabbit axis, rabbits. And we'll start. That will be 0. And then this will be 1, 2, 3, 4, and then that will be 5 rabbits. And then in this axis I will do the berries. So this right over here, let's make this berries. This is berries. And then this is berries. And so this is my berries axis. Now let's plot these points, these different scenarios. So first we have Scenario A. Maybe I should've done all these colors in that Scenario A color.
Scenario A, 5 rabbits, 0 berries. We are right over there. That is Scenario A. For example, Florida has the ideal environment to grow oranges, and Oregon's climate is best for apples. Florida has a comparative advantage in orange production, and Oregon has one in apple production. If Florida ignored its advantage in oranges and tried to grow apples, it would create an inefficient use of resources.
The U. At the same time, any point outside the production possibilities curve is impossible. More of both goods cannot be produced with the limited resources. On the chart, that is point F. The production possibility curve bows outward. The highest point on the curve is when you only produce one good, on the y-axis, and zero of the other, on the x-axis. On the chart, that is Point A, where the economy produces , apples and zero oranges.
The widest point is when you produce none of the good on the y-axis, producing as much as possible of the good on the x-axis.
On the chart, that is point D: The society produces zero apples and 40, oranges. All the points in between are a trade-off of some combination of the two goods. An economy operates more efficiently by producing that mix. The reason is that every resource is better suited to producing one good over another. Some land is better suited for apples, while other land is best for oranges. Society does best when it directs the production of each resource toward its specialty.
The more specialized the resources, the more bowed-out the production possibility curve. The curve does not tell decision-makers how much of each good the economy should produce; it only tells them how much of each good they must give up if they are to produce more of the other good. It is up to them to decide where the sweet spot is. In a market economy , the law of demand determines how much of each good to produce.
In a command economy , planners decide the most efficient point on the curve. They are likely to consider how best to use labor so there is full employment.
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