The Concepts of Productive Efficiency - Essay Example

The society with their unlimited wants and desires have made natural resources scarce. The rapid growth in population, changes in the technology, increased investments in human societies all have created a concept of scarcity. This has been aided further by the desire to grow quickly. This has made many important resources to dry up and countries are looking towards other to fulfil those desires. This has forced countries to develop a model where they produce goods they are efficient at so that the benefit can be accrued to the society. Production Possibility Frontier is a tool which helps the countries to decide the areas that will help them achieve efficiency. Production Possibility Frontier “is a point where the resources of an economy are used in the best possible manner to produce goods and services so that maximum efficiency can be achieved”. (Shenk, 2010) This shows the most efficient point and any point other than it calls for the economy to move towards efficiency. The concept of production possibility curve is widely used in today. A research in this field shows that “production possibility frontier underlies the supply curve”. (Garrison, 1995) This study has made it possible to understand the relation the production possibility curve can have in real life. This model when worked together with the Keynesian model has made it possible to understand the factors which determine the supply curve. It has been possible as both moves in the same direction and organisations look to manufacture those which gives them maximum benefit thereby aligning with the possibility frontier curve. As, both looks towards achieving efficiency based on demand thereby helping in determining the supply curve. The concept of production possibility was developed due “to the concept of scarcity”. (PPF, 2010) The unlimited wants depleted the natural resources forcing the economy to manufacture products which will provide them with the maximum advantage and help to achieve efficiency. This model thereby highlights an important fact that production has a limit in every economy and the economy needs to decide what it wants to produce and in what quantity. The production possibility frontier has certain assumptions based on which it functions. Firstly, the model works in the short run. This is so because it is difficult to change the factor of production in a short span of time. Secondly, this model needs that the same resource be used for the production of both the goods. Since, it is a two good model so using the same resource will ensure that the resource is divided among the two in the best manner possible. Thirdly, it is assumed that technology remains static which is not true in the real sense but it is difficult to change those in the short run. Fourthly, it considers that the economy is under full employment and to produce one good some labour has to be shifted thereby affecting the production of other good as well. Fifthly, it is based on the backdrop that both the factors of production are mobile to produce both the goods. The following example will help to understand it better. The model is based on two goods model and helps to demonstrate the advantage the economy can gain by producing so. For example suppose based on the availability of land and labour an economy can produce either wine or grain. The production chart looks as follows Wine (in bottles) Grain (thousand bushels) 0 15 5 14 9 12 12 9 14 5 15 0 The concept of two good production possibility frontiers is based on the concept of opportunity cost. Opportunity cost is “the opportunity foregone to produce a particular good in place of another”. (PPF, 2010) As seen in the above example where 1 bushels of grain had to be sacrificed to produce 5 bottle of wine. This is the opportunity cost that had to be incurred to manufacture wine. This thus determines the next best value that could have been achieved by the same resource. A study here demonstrates that “opportunity cost theory is based on the utility approach”. (Knight, 1928) This states the fact that the production possibility curve which looks to provide the efficient frontier is based on the maximum monetary value which will be yielded if the factors of production are put in another use. This supports the fact that opportunity cost helps to drive maximum utility based on which an economy decides what to produce. This helps to make the production possibility curve efficient as utility gets measured and helps to achieve the maximum obtainable result. The above production chart shows the efficiency of an economy to produce wine and grain. Using all its resources the economy can product zero bottles of wine and 15 thousand bushels of grain. The economy needs to decide the quantity of each to be produced based on the demand and efficiency they can achieve. When we plot the above production chart it appears as follows The above graph shows the efficient frontier that the economy can achieve. The production frontier line shows the points where producing goods will give maximum efficiency. This are the points where the available resources employed by the economy are put in best use. Any point below the line shows inefficiency. For example, suppose the factors of produce goods at a point a as seen in the graph above demonstrates inefficiency. It shows that some of the factors have been underutilized. This is causing the economy to loose on some vital resources. It is due to the fact that one product is produced more at the cost of other thereby underutilizing the resources. The inefficient frontier looks as follows The above chart highlights the relationship in case of an inefficient frontier. This causes firms to lose on the vital resources and economies look towards efficient frontiers so that they can achieve efficiency. Inefficiency in the production process can arise because of the following reasons Firstly, the management is insufficient to control its resources thereby leading towards wastage of it. Secondly, the process used to manufacture is impractical and requires change. Thirdly, improper governance is causing some vital leaks in the manufacturing process causing inefficiency. Lastly, the economy is relying on processes which are old and sophisticated thereby causing wastage. Economies look towards avoiding this inefficiency. They want to be on the frontier line and look for ways to improve it. Suppose, a change in technology makes it possible to produce more wine bottles as in the previous example with the same resource will push the efficient frontier line ahead and will look as follows Economies looks for development which will help them move their efficient frontier line beyond. To achieve this different technology and mechanism are used so that it reap better benefits. Even a study supports it as it states that “technical efficiency of a firm can be achieved by establishing a relationship between production and potential production possibilities”. (Herrero & Pascoe, 2002) This demonstrates that technical efficiency helps a firm to develop and provides new alternatives where the production possibility curves moves rightward or outward thereby increasing efficiency. This increases the value of the curve as changes in technology will help to determine the manner in which the efficiency can be improved. This is seen below Economies by using the developments look towards moving the efficient frontier more in the rightward direction. This will ensure that the resources are used in the best manner thereby reflecting on the efficiency that can be achieved. The movement will ensure that more and more growth opportunities arise and the same resource being able to be used for other purpose will affect the efficiency by increasing it. The production possibility curve for goods which are similar changes a bit though the model remains the same but the chart appears different. For example, an economy produces two types of car. Using the same factors both types of car can be produced. This would make the production possibility frontier look as follows This highlights the fact that when similar products are produced then the production possibility curve straightens and slopes downwards. This shows that using the same resource different model of the same product can be produced effectively. The two good production possibility curve thus highlights that economy needs to ensure that the resources are used efficiently and effectively. The economy should ensure that production of goods which gives them maximum benefit is produced efficiently. This will help to achieve efficiency. Economies should also be on the lookout for techniques and methods which will help to improve efficiency with the same resources. This will ensure that the resources are put to the best use possible and will help the economy gain maximum advantage thereby ensuring growth. References Garrison R, 2005, “Linking the Keynesian Cross & the Production Possibilities frontier”, Journal of Economic Education, Volume 26 Herrero I & Pascoe S, 2002, “Estimation of technical efficiency: a review of some of the stochastic frontier & DEA software”, Volume 15, Issue 1, page 1 Knight F, 1928, “The opportunity cost doctrine”, Journal of Political Science, page 355 PPF, 2010, “Production Possibility Frontier”, retrieved on August 14, 2010 from www.oxfordtextbooks.co.uk/orc/gillespie_econ Shenk R, 2010, “Production Possibility Frontier”, tutor2u Production Possibility Frontier, 2010, “Production Possibility Frontier”, Internet Centre for Management & Business administration, retrieved on August 14, 2010 from www.netmba.com Read More