Production Possibility Curve - Economics Concepts, Business Economics & Finance Video Lecture | Business Economics & Finance - B Com

hi there this is a topic video for year
1 microeconomics focusing on the
production possibility frontier the PPF
is a combination of two products these
Goods could be services that shows the
maximum output combinations using all
available factors of production
efficiently let's consider this example
a business that could be supplying pizza
or could be producing sugar and a B and
C are combinations that lie on the
production possibility frontier now
those combinations are efficient output
combinations because they lie on the
existing PPF all of the available land
labor and capital resources are being
utilized efficiently in contrast a
combination shown by point F is not yet
attainable it lies beyond the PPF and in
a few minutes we'll think about ways in
which we could possibly reach
combination F of course it would require
the PPF to shift out words combinations
labelled D and D lie within the PPF and
we call those inefficient combinations
because not all resources are being
either fully utilized or they're being
used in an inefficient way so we could
move for example from point A to point B
and end it with more output of sugar and
the greater output of Pizza which for
most people would be probably good news
so just a quick word on the PPF and
economic efficiency any combination of
for example consumer or capital goods
that lie inside the PPF they happen when
resources are either unemployed or being
used inefficiently combinations of goods
and services that lie outside the PPF
are unattainable at the present moment
and to get there we'd need either an
increase in the supply of factory
resources or higher efficiency
productivity or perhaps improvements in
the state of technology those will be
factors causing an outward shift in the
PPF
and trade between nations trade and
exchange also potentially allows
consumers in the given country to
consume beyond the nations own PPF
producing more of both Goods assuming
their goods that give positive private
or social utility will improve economic
welfare and we call it again in
allocative efficiency now let's move on
to look at the idea of the PPF and
opportunity cost examiners are extremely
keen that you understand how we can use
the PPF to explore opportunity cost
well opportunity cost is the cost of a
choice being measured in terms of the
next best alternative that is given up
or sacrificed in our example we're
increasing the output of cotton by 100
units moving from point A to point B on
the PPF that involve sacrificing 40
units of wheat so the opportunity cost
of employing more resources into cotton
is expressed in terms of the output or
the supply of wheat that we have to
sacrifice and in this case 100 extra
tons of cotton involves sacrificing 40
tonnes of wheat so the opportunity cost
is four tenths of a ton of weight for
each extra ton of cotton that we produce
that's how we show the basic opportunity
cost idea however of course the the
shape of the PPF
is important and the nature of this
curve is there to illustrate diminishing
returns let's have a look at how this
works so about W get a B and C are on
the production possibility frontier so
we are being efficient the question is
how we're allocating the resources
between wheat and cotton and cotton so
with diminishing returns the marginal
extra output of cotton goes down as more
resources are allocated to it as you can
see as we go from A to B to C operative
cotton is going from 300 to 400 but then
only from 400 to 480 become it's
becoming harder to Inc
the output of cotton and to get there
we're having to sacrifice more units of
wheat so the result is that the
opportunity cost measured in lost wheat
output increases so diminishing returns
help to explain the shape of the
production possibility frontier has
drawn in this diagram
not every PPF is a curve sometimes you
can have a straight line PPF let's
explore that for a second or two so if
we have a straight line PPF that
suggests that factors of production are
substitutable with no loss of
productivity in our example here we have
output of consumer goods in the y axis
could be a car for example an output of
a capital good let's say a computer on
the x-axis and as we move down the PPF
the opportunity cost will stay the same
so if the PPF is a straight line if it's
a linear PPF then the marginal
opportunity cost of switching resources
in this case between consumer and
capital goods is going to be constant a
marginal opportunity cost will be
constant example there is that the most
of the cost of extra 15 capital goods as
we move down the curve is 30 consumer
goods in other words two consumer goods
but extra capital good so a linear PPF
has a constant marginal opportunity cost
let's think now about how the PPF can
move shift outwards in our example here
the PPF is shifted out from PP f1 to p p
f2 this means of course that if we're
using 60 consumer goods
instead of example being able to be used
25 capital goods perhaps we can now
produce 42 we can now produce more
capital goods for any given level of
output of consumer goods and lots of
factors shift the PPF out but the
crucial point is in this case that an
improvement in technology which is being
available to use capital goods has led
to an outward shift and the
PPF after the shift more capital goods
can be supplied for each level of output
an improvement hope you can see in
economic welfare so what causes the PPF
to shift outwards let's focus on five
key possible out our causes of an
outward shift firstly if factors of
production become more efficient for
example the output per worker employed
increases or the output per worker hour
increases this increases production for
each unit of input used in production
second cause could be better management
of factor inputs we can prove the
quality of a management and businesses
we can reduce wasted resources and we
can also improve quality as well as
quantity of production the PPF also
tends to shift out if we have more
resources available for example the
investment might lift the stock of
capital and inward migration perhaps
could increase the available supply of
labour PPF also is linked to innovation
and invention to developing new products
new resources and crucially finding
better ways to to make a good or service
we call that process innovation so
businesses that become process
innovation efficient can become much
more productive over time and also land
let's not forget to the factor
production land so the discovery of and
the commercial extraction of new natural
resources that will drive an increase in
productive potential so those are the
key factors that cause the production
possibility curve to shift outwards
here's an interesting evaluation
question can the production possibility
frontier shift inwards and the answer is
yes indeed for some countries some
extreme events can have severely
damaging effect of their production
capabilities so for example countries
that are vulnerable to and affected by
severe natural disaster
drought floods earthquake or tsunami
they can have devastating human costs as
well as economic costs PPF can shift
inwards because of the destructive
effects of civil war and embedded
political conflict that can sometimes
last for many many years there might be
for example outward migration of labor
so-called brain drain effect so nation
might suffer depopulation
as many of its younger more skilled
workers perhaps decide to leave and it
could be the case that productivity
starts to fall it doesn't necessarily
have to rise every year particularly
especially if a country doesn't invest
enough in creating new capital goods if
workers are operating with capital
machinery and equipment which is
becoming very old and technologically
obsolete subject to frequent breakdowns
for example then productivity can suffer
good example of this would be a country
affected by a poor infrastructure so
power blackouts outages and all kinds of
productivity effects caused by
congestion and transport systems and
what-have-you and delays in logistics so
can i PPF shift inwards
yes I can just want to make a quick
distinction in our topic video today
between resource depreciation and
resource depletion so both of these
factors can be negative for country's
PPF resource depletion is when your
existing resources become less
productive because of wear and tear and
age so machinery can depreciate over
time skills if they're not used can
atrophy so for example people who are
suffering from long-term unemployment
their productivity and then
employability may suffer a longer
they're out of work
buildings clearly deteriorate just
consider old hospitals and schools and
the increasing cost of maintenance and
basic infrastructure can become
to capacity limits and breakdowns just
think for example points failures on
tracks and things in the railway system
so is also do depreciate but resources
can also deplete this is a key cause of
an inward shift of the PPF so people can
leave a country call that human capital
flight factors of production can be
wiped out by natural disasters or by
man-made problems which is deforestation
overgrazing of common land and capital
can be scrapped businesses that go bust
for example in a recession or even worse
a depression so it's interesting to make
a distinction between resource
depreciation and resource depletion both
are negative for countries PPF another
aspect of the PPF is showing economic
recovery the upturn phase or the
economic cycle all normally if we were
in a recession we would typically be at
Point E where a combination of capital
labor goods that lies well within the
production possibility frontier so in a
recession for example unemployment will
be high and many businesses will be
operating with underutilized capital
resources so if the economy recovers
will tend to move closer towards the PPF
for example a movement from point A to
point F that involves a fallen spare
capacity was still within the PPF but it
means that resources are being more
efficiently and intensively utilized and
finally a look at how we can show
long-term economic growth using the PPF
and our example here the people have
been shifted out from people you have
one two people you have two and we can
move from combination II for example to
a combination F where both more are both
capital goods and consumer goods are
being produced that is an increase in
productive potential that is an increase
in the country's productive capacity
because it means we can now supply more
of both goods and to an economist
that is essentially economic growth it's
a sustained increase a sustained
increase in a country's productive
potential this is where you can bring
your micro and your macro together so
the country employs successful
supply-side policies will help to bring
about an outward shift to the PPF going
chance for example to put a PPF diagram
into an essay on supply-side economics
so we've covered a lot of time in the
last 15 minutes or so we've covered lots
of different aspects of the PPF factors
that cause it to shift opportunity cost
economic growth diminishing returns
resource depletion and resource
depreciation there's lots of cover
hopefully that you've found this useful
I always go back and press the pause
button if you want to chop down some
diagrams or some key terms loads or
horses on our YouTube channel of course
and also on the chin to your website
thanks for joining us today hope to see
you again sometime soon