Production Possibility Frontier

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The Production Possibility Frontier/Curve is a curve that demonstrates the maximum a country can produce in a certain period of time. It is drawn on the axis that denote the quantity of the goods of interest.

While the curve denotes the potential production possibilities of a country, the actual production is denoted by a point on the xy-plane. The PPF separates the xy-plane into three sectors -- inside the PPF, on the PPF and outside the PPF. If the actual production (the point) is inside of the PPF, the production is said to be inefficient (more can potentially be produced). When the actual production is on the PPF, the production is efficient. The region outside of the PPF is a region in which production is infeasible.

The slope of the PPF indicates the trade-off in production between the two goods. It is also the ratio of the marginal productivity of the two goods (MP of good y/MP of good x). In a competitive market, it is the ratio of the two prices (price of x/price of y). If the PPF is concave, it indicates diminishing marginal productivity for both goods. If the PPF is a straight line, it indicates constant marginal productivity, or constant opportunity costs between the two goods.

Practice Questions

Q Consider a country which produces only milk and eggs. On following graph, illustrate the following situation :

Improvements in animal nutrition raise the general productivity of cows and chickens.

On the graph, demonstrate either (1) a shift of the entire curve, or (2) a movement of the point along the curve or, (3) a movement of the point inside or outside the curve that is caused by the above

A Consider a graph with milk on vertical side and eggs on horizontal axis, when the general productivity increases, both factors have been increased, so answer is (1). The reason is that the curve tells you the maximum you could produce in a country, and here, the potential increases.

Q How do you find values for combined PPF for specialization? Given the table

A First you have to find out who specialize in which good. It involves comparing opp cost between the two person. We find that Mary is better at buns, so she will make buns and John makes cookies (and in fact John has comp adv in making cookies). Next we ask what's the max # of cookies john can make? 4 and zero buns. How about Mary? for Mary, it's 12 buns and 0 cookie (she should make buns becuase she's better at it). With specialization, meaning they each make one thing, we'll have a total of 12 buns and 4 cookies. The 12 buns are made by mary, and the 4 cookies by john, so that's the point on the curve with specialization -- the combined PPF would pass through (12,4). (buns on the x-axis)

Q An isolated economy has ____________ possibilities for specialization when compared to the possibilities available to an easily accessible economy

A the answer is "no"

Q Jerry's production possibilities curve for goods W and Z is W = 20 - 2Z, where W is the quantity of good W produced and Z is the quantity of good Z produced. The combination of W and Z (11, 5) is a __________ point. efficient and unattainable unattainable inefficient but attainable inefficient efficient

A unattainable. If you produce Z = 5 plug it in the equation and you find W = 10, meaning that if you make 5 Z, you can make a maximum of 10 W, so (11, 5) is not attainable.

Q In general, individuals and nations should specialize in producing those goods ... for which they can produce more quickly than others can produce less quickly than others have the highest opportunity cost compared to others have an average opportunity cost have the lowest opportunity cost compared to others

A the last one, as producing the good will take away the least amount of resources.

Q Which of the following statements is always true? Comparative advantage implies absolute advantage Absolute advantage requires comparative advantage Comparative advantage does not require absolute advantage Absolute advantage implies comparative advantage Comparative advantage requires absolute advantage

A third one. The two concepts are different and have no causal relationship.

Q how do you draw a joint ppc curve? Sanjeev and Siran are both computer programmers. They can each either modify web pages or write lines of code. Sanjeev and Siran each spend 8 hours a day programming. The following table specifies how many web pages and lines of code Sanjeev and Siran can modify per hour.

A step 1, if they both do web pages, then they could do a total of 24 web pages.

step 2, if they both do lines, then they could do a total of 20 lines.

step 3, figure out specialization. when specialize who should do which job? Then figure out how many products are produced. In our case, siran should make web pages and sanjeev should produce lines of code. With specialization, figure out how many lines and pages could be done. With sanjeev doing lines, there are 8 lines; with siran doing web, there will be 20 pages

step 4 draw the graph. If we have lines on the x-axis, then draw these three points from above: (0, 24), (20, 0) and (8, 20)

Q The Cheap'n'Fresh Grocery Store has five checkout lanes and four employees. Employees are equally skilled, and all are able to operate a register (checkers) or bag groceries (baggers). A lane with a checker and a bagger can check out 70 customers per hour. A lane with a checker only can check out 50 customers per hour. What is the best allocation of the four employees if the store opens respectively two lanes, three lanes, four lanes or five lanes? Calculate the corresponding total number of customers per hour and the labour productivity for each number of open lanes.

A There're four employees, so if 2 lanes are open, then 2 checker and 2 bagger. Total productivity is 140 and average is 140/4 = 35.

when there're 3 lanes, then 3 checker and 1 bagger, for 170. Average is 170/4

For 4 open lanes, total productivity is 200.

Then even though there are 5 lanes, only 4 lanes can be used. For 5 lanes, total productivity is still 200 because only 4 lanes are used.