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Production Possibility Frontier
Pages 2 (502 words)
In economics, a Production Possibility Frontier or "transformation curve" is a graph that shows the different quantities of two goods that an economy could efficiently produce with limited productive resources. Points along the curve describe the trade-off between the two goods, that is, the opportunity cost.
As indicated on the chart above, points A, B, and C represent the points at which production of Good A and Good B is most efficient. Point X demonstrates the point at which resources are not being used efficiently in the production of both goods, and point Y demonstrates an output that is not attainable with the given inputs (Investopedia, 2000)
Production Possibility Frontier assumes that all possibilities are fixed, however over time it may shift in or out depending on the economic situation. Economic growth pertaining to discovery of new resources, improvement of technology, and capital accumulation results to outward shift. On the other hand, inward shift may occur when there is a decrease in supplies and production possibility or deficient technology and resources.
Inward shift indicates that the economy is shrinking. In that sense, any burden in the economy such as unemployment, destruction of capital goods, and disturbance in people's lives may lead to such shift. For example, the 1973 oil crisis shocked the Japanese economy which was heavily depended on oil, thereby shifting Japan's PPF inward (Post war). Post war has caused great deal of damage, human and physical capital wise, of which had decreased the production possibility.
A PPF is normally drawn as concave to the origin because the extra output resulting from allocating more resources to one particular good ...
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