“The Production Possibilities Frontier”

 > Explanatory Article by Marios Kyriakou, MSc Economics


About the author: Marios Kyriakou has a bachelor’s degree in Economics from the University of Cyprus and a master’s degree in Economics from the University of Warwick. He is also a holder of CySEC’s Advanced Certificate in Financial Services Legal Framework and a professional in Online Trading, Forex and CFDs with more than 7 years of experience.

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<Last updated 13.04.2020>

Dear reader,

Hi! If you are interested in Economics, I’ve prepared the below to help your understanding about production. You should take a look at this short article in which we show how production is always bound by the production possibilities of an economy due to scarcity of resources.

An economy cannot produce an infinite amount of goods and services since resources are limited. Economic activities are taking place on a continuous basis involving the extraction of raw materials, agricultural production, transforming raw materials into products and goods. Thus, it can be possible for people to satisfy their continuous needs and wants. We have already mentioned that one of the most important functions of an economy is the production of goods and services. It is the act of creating output, a good or service which has value and contributes to the utility of individuals.

In the economy there are various industries, group of companies/businesses that are related based on their primary business activities. The group of companies producing a homogeneous or slightly diversified product is called the production Sector (industry). Examples: Pharmaceutical industry. Computer industry. Software industry. Construction industry. Education industry. Energy industry etc.

According to the type of product/good or service a classical breakdown of economic activity distinguishes three sectors: a) Primary Sector b) Secondary Sector c) Tertiary Sector. The primary sector involves extraction of raw materials and natural resources such as metals, oil and natural gas. Also Farming, Forestry and Crop Production. The secondary sector involves manufacturing of cars, handmade crafts and production of antibiotics. so the transformation of raw material into a product, or good. The tertiary sector involves services provision such as healthcare, education, brokerage services.

Due to scarcity of resources, people have to decide what types of goods to produce and in what quantities.  These questions can be answered based on the consumer preferences, however production is always bound by the production possibilities of an economy. These are determined by the amounts of factors of production available and the level of technology that the economy has in procession.

The Production Possibility Curve (PPC) is the possible trade-off of producing combinations of goods with constant technology and resources that are used efficiently and fully. It shows the maximum possible output combinations. An example with 2 goods follows:

In the diagram the economy produces only 2 goods. Fixed quantity and quality of factors of production. Fixed level of technology. All factors of production are employed fully and efficiently.

The combinations inside the region have lower quantities, a smaller level of production. This is because either the factors of production are not fully used or they are used with inefficient way. Sub-unemployment and the non-efficient use of factors of production is a common phenomenon. The combinations that are outside the region (i.e. X and Y) of the production possibility frontier are called impossible combinations because the economy doesn’t have sufficient quantities of factors of production.

A shift in the PPC curve to the right means Economic Expansion or Economic Growth. The above shows an increase in the production possibilities of the economy. A decrease is called Economic Contraction. This might happen because of an increase in the quantities of factors of production, and /or an improvement in the level of technology used in the process of producing these goods.


 

“I hope I am clear on this one. If not, contact us on social media and we will do our best to help you.

Thank you for reading my articles and watching my videos.”

Marios Kyriakou

References:
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Βλαδιμήρου-Παναγιώτου Β. και Κουζαλή-Σωτηρίου Ε., Οικονομικά Γ’ Λυκείου, Κύπρος, Α΄ Έκδοση 2017.  Υπηρεσία Ανάπτυξης Προγραμμάτων, Κύπρος.
Besanko, David Braeutigam, Ronald R. Gibbs, Michael, 2011, Microeconomics, Hoboken: John Wiley, 4th ed,
International student version
Frank, Robert H., 2010, Microeconomics and Behavior, New York: McGraw-Hill Irwin, 8th ed.
Estrin, Saul Laidler, David E. W. Dietrich, Michael ., 2008, Microeconomics, Harlow: FT/ Prentice Hall, 5th ed.

Disclaimer: This article is intended for educational purposes only and does not replace independent professional judgement. Its purpose is to act as a complementary educational service to society, promoting personal development and social, economic and cultural progress of citizens. While this content has been prepared in good faith, no representation or warranty, express or implied, is or will be made and no responsibility or liability is or will be accepted by the creator to the accuracy or completeness of the information presented or any other written or oral information made available to any interested party and any such liability is expressly disclaimed.

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