![]() Any point on the PPF is a point that is Pareto optimal, productively and allocatively efficient due to the utilisation of all the factors of prodcution in the economy (Point B, C, and D). The diagram below shows the basic shape of a country's PPF, illustrating the distribution and allocation of resources towards producing goods to help the economy achieve the full employment level of output. The decrease in production represents the opportunity cost and this is quantified by the gradient of the PPF at any one point. This increases the production of one good but decreases the production of the other. The PPF is the diagram that is best used to highlight the economic problem because if an economy moves from one point on the PPF to another it involves an opportunity cost as finite and scarce resources have to be diverted from one industry to another. And because scarcity forces an economy to forgo one choice for another, the slope of the PPF will always be negative if production of product A increases then production of product B will have to decrease accordingly.A convex curve that graphically represents the production points for an economy where all resources are fully engaged in the production of an economy's goods and services. In reality, economies constantly struggle to reach an optimal production capacity. A shrinking economy could be a result of a decrease in supplies or a deficiency in technology.Īn economy can be producing on the PPF curve only in theory. Alternatively, when the PPF shifts inwards it indicates that the economy is shrinking as a result of a decline in its most efficient allocation of resources and optimal production capability. When the PPF shifts outwards, we know there is growth in an economy. ![]() A new curve, on which Y would appear, would represent the new efficient allocation of resources. Output would increase, and the PPF would be pushed outwards. However, if there was a change in technology while the level of land, labor and capital remained the same, the time required to pick cotton and grapes would be reduced. Point Y, as we mentioned above, represents an output level that is currently unreachable by this economy. Point X means that the country's resources are not being used efficiently or, more specifically, that the country is not producing enough cotton or wine given the potential of its resources. If more wine is in demand, the cost of increasing its output is proportional to the cost of decreasing cotton production. ![]() Keep in mind that A, B, and C all represent the most efficient allocation of resources for the economy the nation must decide how to achieve the PPF and which combination to use. However, if the economy moves from point B to C, wine output will be significantly reduced while the increase in cotton will be quite small. As the chart shows, by moving production from point A to B, the economy must decrease wine production by a small amount in comparison to the increase in cotton output. If the economy starts producing more cotton (represented by points B and C), it would have to divert resources from making wine and, consequently, it will produce less wine than it is producing at point A. Īs we can see, in order for this economy to produce more wine, it must give up some of the resources it uses to produce cotton (point A). Point X represents an inefficient use of resources, while point Y represents the goals that the economy cannot attain with its present levels of resources. According to the PPF, points A, B and C - all appearing on the curve - represent the most efficient use of resources by the economy. Imagine an economy that can produce only wine and cotton. ![]()
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