PPF illustrates the concepts of choice and opportunity cost. If we assume
that a country only produces food and clothing.
If that country wishes to produce more food, then it would have to
sacrifice the production of some food. Therefore
we can say the opportunity cost of producing more food is clothing.
If the economy is producing at point V is can be seen
that it is not producing efficiently, as it could increase production of
clothing and food with the resources it already has.
We can also demonstrate the concept of increasing
opportunity costs. In other
words that as a country produces more and more of one good it has to
sacrifice increasing amounts of the other.
This occurs because different factors of production have different
properties, people have different skills, land differs in different parts of
the country etc.. Therefore as a
nation concentrates more on the production of one good, it has to start using
resources that are less and less suitable.
The production of more and more clothing involves a growing marginal
cost - ever increasing amounts of food have to be sacrificed for each
additional unit of clothing produced.
is because of increasing opportunity costs that the PPF is bowed outwards,
rather than being a straight line. In
the diagram below we can see that as production increases from x to y to z,
so the amount of food sacrificed rises for each additional unit of clothing
produced. The opportunity cost
of the fifth million units of clothing is 1 million units of food.
The opportunity cost of the sixth million units of clothing is 2
million units of food.
remember the example of the nation going to war and having to produce guns
after only producing food.
Shifts of the PPF
you know, a nation is unable to produce outside of the PPF. A nation is able
to shift its PPF to the right (so that it can produce a greater amount of
goods) in one of two ways:
- Increasing the
number of resources available for production, e.g., increase in the number
of workers or factories.
- Increasing the
quality of resources available for production, e.g., education and
training makes workers more productive, technological progress allows
machines to produce more with the same amount of resources.
shift of the PPF can be shown below:
Notes on the Internet
An exercise to demonstrate scarcity and production possibility
Produced by John and Margaret Ray