Tourism and Hospitality
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The production possibility frontier (curve): the PPF or PPC
The starting point in our economic analysis is to consider what an economy can produce. As consumers we may want many things, but there is a limit to what our economy can actually produce. This can be analysed using the production possibility frontier (PPF). In this unit we examine the factors that determine how much an economy can produce and the implications of different output decisions.
LEARNING OBJECTIVES
By the end of this unit you should be able to: ✔ understand what is meant by a production possibility frontier; ✔ analyse the shape and the position of the production possibility frontier; ✔ understand the concept of productive efficiency.
■ Scarcity and choice
In Unit 1 we saw how the study of economics was based around the issue of scarcity and choice. As consumers our wants are unlimited, but there is a limit to what an economy can produce because of a scarcity of resources. As consumers and voters we are, of course, interested in what an economy can produce. What an economy is capable of producing can be shown on a production possibility frontier.
■ The production possibility frontier (PPF)
The production possibility frontier or curve (PPF or PPC) shows the maximum output that can be produced in an economy at any given moment, given the resources available. If an economy is fully utilising its resources then it will be producing on the PPF. To keep
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2: The production possibility frontier
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Product A (units)
Q0 Q1 X
Q3 0
Y
Q2
Q4 Q5
Product B (units)
Figure 2.1 Transferring resources out of producing product A into producing product B.
our analysis simple we consider an economy that produces only two products, A and B (see Fig. 2.1). Imagine that all of an economy’s resources, such as land, labour and capital, were used in industry A. Then Q0 of A would be
1/15/07
14:45
Page 16
»2
The production possibility frontier (curve): the PPF or PPC
The starting point in our economic analysis is to consider what an economy can produce. As consumers we may want many things, but there is a limit to what our economy can actually produce. This can be analysed using the production possibility frontier (PPF). In this unit we examine the factors that determine how much an economy can produce and the implications of different output decisions.
LEARNING OBJECTIVES
By the end of this unit you should be able to: ✔ understand what is meant by a production possibility frontier; ✔ analyse the shape and the position of the production possibility frontier; ✔ understand the concept of productive efficiency.
■ Scarcity and choice
In Unit 1 we saw how the study of economics was based around the issue of scarcity and choice. As consumers our wants are unlimited, but there is a limit to what an economy can produce because of a scarcity of resources. As consumers and voters we are, of course, interested in what an economy can produce. What an economy is capable of producing can be shown on a production possibility frontier.
■ The production possibility frontier (PPF)
The production possibility frontier or curve (PPF or PPC) shows the maximum output that can be produced in an economy at any given moment, given the resources available. If an economy is fully utilising its resources then it will be producing on the PPF. To keep
FOE_C02.qxd
1/15/07
14:45
Page 17
2: The production possibility frontier
»
17
Product A (units)
Q0 Q1 X
Q3 0
Y
Q2
Q4 Q5
Product B (units)
Figure 2.1 Transferring resources out of producing product A into producing product B.
our analysis simple we consider an economy that produces only two products, A and B (see Fig. 2.1). Imagine that all of an economy’s resources, such as land, labour and capital, were used in industry A. Then Q0 of A would be