If you are reading this post, surely that means you are interested or you have chosen to study economics! How exciting, let’s celebrate for a moment and appreciate that you have joined the economics nerd group! However, if it is you’re first time here and you haven’t seen The Nature of Economics PART 1, we highly recommend you do so before you read this segment! Click here to go back to the previous post!

In this post we will be discussing:

  • Production Possibility Frontier (PPF)
  • Shifts in the PPF
  • Future implications of current choices by individuals, businesses and governments

 

Production Possibility Frontier

The Production Possibility Frontier (PPF) is a curve depicting all maximum output possibilities for two goods such as cars and trucks / boats and yachts / shorts or pants etc. The organisation must then decide to produce only shorts and no pants or, pants and absolutely no shorts or, both but at an opportunity cost of each other. With a given amount of fixed maximum level of resources (workers, capital, technology and materials) the organisation can choose either method mentioned previously. This means that the business should aim to produce as many jobs as it can and to produce as much goods/services as it can using the resources available. The PPF is a graph with a vertical x-axis and a horizontal y-axis.

PPF

If a business aims to produce at its maximum capacity and has as a certain amount of workers and resources (e.g. fabric) this will maximise employment and reduce wastage or unused resources. The PPF helps identify the desired units of both commodities that can be produced together. And it is up to organisations to decide the production mix to maximise the overall benefit to the economy.

 

Shifts in the Production Possibility Frontier (PPF)

The PPF graph does not remain the same all the time. Which means that there is a chance to increase the production possibility frontier through certain factors such as new technology, increase in labour force, discovery of new raw materials etc. The implications of technological change can result in a bigger and better PPF by increasing production with minimal cost and increased productivity, otherwise offered by workers who are now fired or forced to work elsewhere until all other producers have adopted the same technological equipment to minimise costs (wages). This however, results in high levels of unemployment and lower income levels that will affect the profitability of businesses which means businesses must still keep people employed! There always needs to be a balance.

 

Future implications of current choices by individuals, businesses and governments

Individuals may choose to go on a holiday and live a great short term lifestyle rather than paying mortgage or buying a house. Businesses may be focusing on one section of the business with the limited time they have rather than another which may affect how the business performs in the long run e.g. successful campaign vs unsuccessful campaign. Governments have very important roles in the society and may focus on the short term goals such as welfare and health care rather than building a new port for imports and exports. All of the choices made by each party will affect themselves in different ways.

 

These economic factors listed below affect underlying decision making:

  • Individuals: spending, saving, work, education, retirement, voting and participation in the political process
  • Business: pricing, production, resource use, industrial relations
  • Governments: influencing the decisions of individuals and business

 

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