In what ways does the Production Possibility Frontier (PPF) illustrate the following economic concepts: scarcity, resources and their employment and management, and trade offs that require choices?
The Production Possibilities Frontier or Curve (PPF/PPC) illustrates many of the introductory concepts in economic theory. First, let's define the frontier. In the Survey of Social Science, the definition is as follows: "A PPF is defined as a graphical illustration of the combinations of goods produced in a given economy at a given time, if all the available resources are fully and efficiently employed." The discussion goes on to emphasize that often just two goods are picked for analytical purposes. For example, they might pick butter and missiles, or fighter jets and space missions, or fighter jets and satellites, or magazines and books.
(Source: Survey of Social Science (Frank N. Magill, Editor), Pasadena, California: Salem Press Inc., pp. 1812-1817.)
Illustration of Scarcity:
Scarcity is an economic concept that refers to a relatively permanent dearth or insufficiency of resources available to people, in relation to their wants. Economics considers people to be restless consumers, always consciously wanting to add to their possessions, but having a vague awareness that only some wants can be satisfied. Some needs are universal and absolutely necessary. Food and water, for example, are paramount. Many wants are individual, they are part of what makes an individual unique in society. The key aspect of this behavioural science, as it relates to economics, is that individuals and societies are forced to make economic choices in two ways.
One way is to get more out of their limited resources—"stretching the budget," as we say.
The other way is to expand resources, possibly by getting a new and better job, in order to satisfy wants on a greater basis. Either of these possibilities requires difficult choices, and that's what the PPF is about.
Illustration of Resources
Without resources there would not be any goods or services available in the society. Resources are the factors of production: land, labour, capital, and the fourth, which seems to get increasing attention since it may well be at the heart of increased productivity, entrepreneurship. Some factors are finite—land, for example. We can't add to the land mass of the earth. Some can be used to make new resources; particularly the right combinations of labour, capital, and entrepreneurship. All of these can be combined to make a new organ for an ill individual, for example.
The way we combine the relevant factors leads to the shape of the PPC.
Employment and Management of Resources
We can identify three possible scenarios for the employment and management of resources on the PPF.
- Points on the curve: these points are attainable by the economy. They represent combinations of goods and services for which resources are being efficiently employed. Production efficiency is achieved when we can produce more of one good or service, by producing less of another. In other words, trade offs are necessary as we move more toward one good or service than another, and the further we move toward the one, the more difficult and costly that reallocation becomes.
- Points inside the curve: these points illustrate less than full employment, or poor management of the economy's resources. In contract negotiation, for example, bids could be rigged and competition stifled.
- Points outside the curve: these points are beyond the capacity of the economy to produce at this time. Resources are unavailable to meet these kinds of production expectations.
Trade offs Require Choices
Pick up fig. 1-3 p. 7, Test item file, from Ball, McLeod, Cawfield …. Macroeconomics
Note that the shape of the PPF is distinctive—nearly flat at its upper end, and then progressively more vertical. Notice too that every point on the curve represents the full and efficient employment of all factor resources in the economy. Any movement along the curve represents costly reallocations or tradeoffs for a society. To shift resources from one industry, or sector, to another brings increasing opportunity costs to the economy. Thus, societies will, under normal conditions, encourage specialization of labour, and will avoid costly reallocations of the factors of production that increase costs.