Production Possibility Frontiers

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  • Topic: Economics, Ceteris paribus, Production-possibility frontier
  • Pages : 3 (710 words )
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  • Published : April 16, 2013
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Economics Extended Response
Outline how the production possibility frontier can be used to demonstrate opportunity cost and examine how the effects of unemployment and technical change on production in the economy.

A production possibility frontier is a basic model that can examine the efficiency of an economy’s resource use, irrespective of the wants of that economy. A production possibility frontier is the simplest tool usable to demonstrate opportunity cost, at all possible combinations of two goods in production, the extremes being maximum Good A production with no Good B production, and maximum Good B production, with no Good A production. In all PPFs, a series of rules must be followed. They can be summed up with the term ceteris paribus (all things remaining equal). Ceteris Paribus relies on the following assumptions: * The economy can only produce two resources.

* These resources are at a fixed quantity.
* These resources are fully mobile.
* Technology will remain at a constant rate.
* The economy is a closed one.
An example of a basic production possibility frontier is shown in Fig. 1 below. Q
R
Q
R
Figure 1: Economy of Zogg PPF
Figure 1: Economy of Zogg PPF

As seen in Fig. 1 above, a PPF can easily demonstrate opportunity cost. The opportunity cost of moving from point Q, to point R on the frontier for example, is 5 units of Good A, given up to produce 3 extra units of Good B. Plotting A on the Y axis, it is easy to see that moving 5 units down, yields 5 units less of that good for the production of 3 units right along the X axis (Good B). Two new points have been added to Figure 1 that do not lie on the frontier; Point Y and Point Z, to make Figure 2 below. At this point, in this stage of Zogg’s economic development, Point Y is possible to be achieved however point Z is not. Because the frontier itself marks the maximum production capacity of the possible combinations of Good A and Good B, it is possible indeed to be...
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