Question

explain how a production possibility frontier can be use

Answer 1

Answer on Question #44325 – Economics – Finance

Question

Explain how a production possibility frontier can be used

Answer

A production possibilities frontier (PPF) can be used to illustrate a number of economic concepts, such as scarcity of resources (i.e., the fundamental economic problem all societies face), opportunity cost (or marginal rate of transformation), productive efficiency, allocative efficiency, and economies of scale.

In addition, an outward shift of the PPF results from growth of the availability of inputs such as physical capital or labour, or technological progress in our knowledge of how to transform inputs into outputs. Such a shift allows economic growth of an economy already operating at its full productivity (on the PPF), which means that more of both outputs can be produced during the specified period of time without sacrificing the output of either good. Conversely, the PPF will shift inward if the labor force shrinks, the supply of raw materials is deleted, or a natural disaster decreases the stock of physical capital.

However, most economic contractions reflect not that less can be produced, but that the economy has started operating below the frontier—typically both labor and physical capital are underemployed.

The combination, represented by the point on the PPF where an economy operates, shows the priorities or choices of the economy, such as the choice of producing more capital goods and fewer consumer goods or vice versa.

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