Answer to Question #132052 in Microeconomics for Ashmita Shrestha

Question

Using a production possibilities frontier (PPF) diagram, determine how does the PPF change
in response to the following events:
a) A relaxation of policies allowing more foreign direct investment into the country
b) Increasing the minimum wage level
c) A decrease in expenditure on research and development
d) An increase in the retirement age
e) Government policies supporting the provision of services, without affecting
manufacturing

Answer 1

The Production Possibilities Frontier (PPF) is a graph showing all the different output combinations of two goods that can be produced using the available resources and technology. The PPF incorporates scarcity, option and trade-off principles. The form of the PPF depends on whether the cost increases, decreases or is constant.

Points that lie on the PPF demonstrate productively efficient combinations of production. Without knowing preferences we can't determine which points are allocatively efficient. The PPF slope shows the opportunity cost of producing one good versus the other good, and the opportunity cost may be contrasted with the opportunity cost of assessing a competitive advantage for another producer.

Since society has limited resources at any point in time (e.g., labor, property, capital, raw materials), there is a limit to the amounts of products and services it can produce. Assume a organization requires two things, healthcare and education.

a)     When the policies are relaxed, the economy generates more or less of the quantities indicated by the PPF, resources are ineffectively controlled and the economic stability of the nation would deteriorate.

b)     The boundary of production potential shows that output limits exist, or should be. When you increase the minimum wage, then less people will be involved in production and an economy must determine what combination of goods and services can and should be created, in order to achieve productivity.

c)     The PPF assumes that technical infrastructure is constant, and underlines the notion that the cost of opportunity usually occurs when a resource-limited economic entity has to decide between two goods. When there is a decrease of expenditure on research and development, then there is less production which will cause a strain on one product compared to another.

d)     An increase in retirement age will lead to low productivity as more people will remain in the service hence rendering unemployment. The PPF will assume that there is a lot of unemployment and will affect the economy negatively.

e)     In theory, an economy can be developed only on the PPF curve. In fact, economies are constantly struggling to attain optimum capacity for production. And because scarcity causes an economy to abandon some option in favor of others, the PPF slope will always be negative. That is, if product A production increases then product B production will need to decrease.