Monday, April 7, 2008

Movements of the Production Possibilities Frontier

A production possibilities frontier (PPF) illustrates the possible production points for an economy with a given set of resources and technology. If the economy’s resources or technology change, then the production possibilities frontier will change, too.

Changes in Resources or Technology Shift or Pivot a Production Possibility Frontier: Study Time Example

A PPF can change its shape or positioning if the society gains or loses resources or if there is a change in technology.

A Parallel Shift of the Entire Curve Due to a Change in Resources, but No Change in Technology

If there is a change in the number of hours devoted to study in the example above, then the PPF will change. For example, if you have six hours of time (instead of five), then the maximum amount of economics you could read is 120 pages (if you devote all six hours to reading economics and spend no time reading history). The maximum quantity of history you could read is 300 pages (if you devote all six hours to reading history and spend no time reading economics). Since one hour can be spent reading 20 pages of economics or 50 pages of history, the opportunity costs of reading economics and history are still constant (20 pages of economics = 50 pages of history). Thus, the PPF is a straight line with the same constant slope. Similarly, if there are only 4 hours of time, then the maximum amount of economics you could read is 80 pages (if you devote all four hours to reading economics and spend no time reading history). The maximum quantity of history you could read is 200 pages (if you devote all four hours to reading history and spend no time reading economics). The graph above illustrates how a change in resources can change the production possibilities frontier for an economy.

One of the ways an economy can become more prosperous is to acquire additional economic resources. The quantity of labor can increase through population increases from higher birth rates, health care innovations that extend the average life span, or immigration. Increases in capital typically occur through conscious investment in physical capital, human capital (education), and technology. Natural resources can be increased if the renewable ones (such as forests) are well managed. Despite moral and ethical concerns, history has numerous examples of societies that increased their labor, capital, and natural resources through the conquest, plunder, and enslavement of other people.

A Parallel Shift of the Entire Curve Due to a Change in Technology, but No Change in Resources

A change in technology also shifts a production possibilities frontier (PPF). For this example, assume the resources under consideration are always five hours of study time. The initial technology is the same as in the example above. You are able to read a maximum of 20 pages of economics in an hour or a maximum of 50 pages of history per hour. In the five hours of study time, you could read a maximum of 100 pages of economics if all five hours are devoted to it. Alternatively, if all five hours are spend reading history, you could read a maximum of 250 pages.

Now suppose a tutor improves your ability to read all subjects. Suppose the tutor provides you with techniques and strategies that allow you to read all subjects 10 percent faster. Now you are able to read 22 pages of economics in an hour (instead of 20) and you can read 55 pages of history in an hour (instead of 50). The effect of this technological improvement (i.e., your ability to read) is that the production possibilities frontier (PPF) shifts further from the origin. Now, the maximum number of pages of economics that can be read in five hours is 110 pages. Alternatively, if all five hours are spent reading history, you could read a maximum of 275 pages.

Technological innovation shifts a production possibilities frontier (PPF) even if there are no changes in resources. Module 6 elaborates on how one of the keys to economic growth is investment in technology so a society can obtain more goods and services from a given set of economic resources.

An Example of a Change in a PPF that Pivots the Curve, Rather than Shifting It

A change in technology can also pivot the production possibilities frontier for an economy. Suppose you work with an economics tutor who helps you read your economics textbook faster. You now can read 22 pages of economics per hour. The tutor does not improve your ability to read history. You still read 50 pages of history per hour. In five hours of time, the maximum amount of history you can read is still 250 pages (if you devote all five hours to reading history and spend no time reading economics) . The maximum amount of economics you can read is now 110 pages (if you devote all five hours to reading economics and spend no time reading history).

Notice that the production possibilities frontier has pivoted rather than making a parallel shift. Because the new PPF has a different slope than the original one, the new opportunity cost must be different than the previous one. Now an hour of study time can be used to read 22 pages of economics or 50 pages of history. So the opportunity cost of reading 50 pages of history has increased to 22 pages of economics. Previously, the opportunity cost of reading 50 pages of history was only 20 pages of economics.

Changes in production possibilities frontiers are not always uniform or symmetric. If the technological innovation affects only one of the products in a PPF, the result is a pivoting of the curve rather than a shift.


Test Your Understanding - Can you draw the changes in the PPF for this example?

Suppose one cowboy can put 100 bales of hay in the barn in an afternoon of work. Alternatively, if the cowboy spends the afternoon building pasture fences, he can build 20 yards of fencing.

If we plot bales of hay on the vertical axis and yards of fencing on the horizontal axis, we could draw a PPF as a straight line from a point representing 100 bales on the vertical axis to a point representing 20 yards on the horizontal axis.

Now suppose a second cowboy with the same abilities assists the first cowboy with the ranch chores. Now, if both cowboys spend the afternoon putting hay in the barn, they could store 200 bales (100 bales per afternoon per cowboy times two cowboys). Alternatively, if both cowboys spend the afternoon putting up fences, they could build 40 yards of fencing (20 yards per afternoon per cowboy times two cowboys). Now we could draw a PPF as a straight line from a point representing 200 bales on the vertical axis to a point representing 40 yards on the horizontal axis. Because we now have more resources (two cowboys instead of one), the PPF shifts further from the origin.

CLICK HERE FOR THE DIAGRAM.

A change in technology also could shift the entire PPF if the technological change affects the products on both axes of the diagram.

3 comments:

  1. how would the discovery of a new oil field affect a country's production possibility frontier

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    Replies
    1. Short term as witnessed in India or Gulf, won't matter much. Again shifting out depends on demand for the oil, price of the oil trending and factors of production obviously.

      Discovery won't lead to ppf to parralel out.

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  2. thanks for this blog... it really helped me a lot with my project

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