Production Possibility Frontier - Essay Example

PRODUCTION POSSIBILITY FRONTIER In economics, a Production Possibility Frontier or "transformation curve" is a graph that shows the different quantities of two goods that an economy could efficiently produce with limited productive resources. Points along the curve describe the trade-off between the two goods, that is, the opportunity cost. Opportunity cost here measures how much an additional unit of one good cost in units forgone of the other good. The curve illustrates that increasing production of one good reduces maximum production of the other good as resources are transferred away from the other good (Wikipedia, 2008).

The PPF assumes that all inputs are efficient. As indicated on the chart above, points A, B, and C represent the points at which production of Good A and Good B is most efficient. Point X demonstrates the point at which resources are not being used efficiently in the production of both goods, and point Y demonstrates an output that is not attainable with the given inputs (Investopedia, 2000)Production Possibility Frontier assumes that all possibilities are fixed, however over time it may shift in or out depending on the economic situation.

Economic growth pertaining to discovery of new resources, improvement of technology, and capital accumulation results to outward shift. On the other hand, inward shift may occur when there is a decrease in supplies and production possibility or deficient technology and resources. Inward shift indicates that the economy is shrinking. In that sense, any burden in the economy such as unemployment, destruction of capital goods, and disturbance in people's lives may lead to such shift. For example, the 1973 oil crisis shocked the Japanese economy which was heavily depended on oil, thereby shifting Japan's PPF inward (Post war).

Post war has caused great deal of damage, human and physical capital wise, of which had decreased the production possibility. A PPF is normally drawn as concave to the origin because the extra output resulting from allocating more resources to one particular good may fall. This is known as the law of diminishing returns and can occur because factor resources are not perfectly mobile between different uses, for example, re-allocating capital and labour resources from one industry to another may require re-training, added to a cost in terms of time and also the financial cost of moving resources to their new use (Production Possibility Frontier and Economic Efficiency).

Sources:Investopedia (2000). Investment Dictionary: Production Possibility Frontier. Retrieved from the web May 4, 2008.http://www.answers.com/topic/production-possibility-frontiercat=biz-fin Wikipedia. (Last modified April 2008). Production-possibility Frontier. Retrieved from the web May 4, 2008.http://en.wikipedia.org/wiki/Production_possibilities_frontierPost War (Since 1945). Retrieved from the web April 2008. http://www.japan-guide.com/e/e2124.htmlProduction Possibility Frontier and Economic Efficiency.

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