Production possibility frontier (PPF) We must assume that

The output level of an economy 6 2 Good X Good Y A Assume we have a 2 goods economy. We use production inputs: labor, resources, capital, methods to produce output. At every point in the chart we then have an output of an economy in respect to these two different goods for which we use different inputs of our economy. 2 8 B

Production possibility frontier Suppose it is possible for our country to produce 2 units of good X and 6 units of good Y. 6 2 Good X Good Y A If we plot good X horizontally and good Y vertically this is represented by point A. Alternatively, suppose that the country, if it wanted to, could produce 8 units of good X and 2 units of good Y. This is represented by point B. 2 8 B X – ex Y łaj

Production possibility frontier Perhaps, country cannot only produce combinations A and B but also many other different combinations. Good X Good Y B Here we have drawn a few. We call the line connecting all possible different combinations the production possibility curve (frontier). A

Production Possibilities Curve – example for Grades in Mathemtics and Economics A – only this extreme positions are In this case expect a grade A X axis Y axis

Production possibility frontier – definictions For each level of the output of one good, the production possibility frontier shows the maximum amount of the other good that can be produced. A graph that shows all the combinations of goods and services that can be produced if all of society’s resources are used efficiently. A curve depicting all maximum output possibilities for two or more goods given a set of inputs (resources, labor, etc.). The PPF assumes that all inputs are used efficiently.

Production possibility frontier Note that the production possibility curve only connects Good Y efficient (2 X and 2 Y) can be produced by Holland, but it Point C could produce more of Y (at A) or production combinations. A more of X (at B) or more of both goods (the line between A and B). B C 6 Good X

Production possibility frontier Thus, the production possibility curve represents efficient output combinations. Good X Good Y final output (including non-optimal combinations) All possible combinations of is called the production possibility set. All this triangle

Production possibility frontier – definictions PPF has great application in international trade theory. Helps one understand difference between comparative advantage and absolute advantage. It also an important historical figure in all this is David Ricardo.

David Ricardo Famous 19th century British economist. Some consider him the grandfather of international trade theory. Very influential in pioneering the theory of comparative advantage. Had a lot of say about the „corn laws” in England. By analysing this market, he created a production posibbility frontier.

A Typical PPF Picture The PPF is typically bowed-out or linear. It is not bowed-in Good Y Very important aspect / feature of Good X

The Shape of the PPF The PPF is outward-shaped because its shape depends on increasing opportunity costs of one good to another. Example: Food and timber with the only available resource is land. First we use up the best land for farming, but with increasing, returns from farming go down since we are using worse land. To produce 1 extra unit of food, we need more and more land, it cost more and more in timber production. Good Y At the expense of – kosztem In order to produce more units of food Good X

The Shape of the PPF In the linear case the slops at all points are identical, while in the bowed case they are different point by point. The slope here means the quantity of good X the economy should give up in order to produce one unit of good Y. Good Y Good X

Marginal Rate of Transformation (MRT) As we can see, in order for this economy to produce more pizza, it must give up some of the resources it uses to produce robots (point A). If the economy starts producing more robots, it would have to divert resouces from making pizza and consequently, it will produce less pizza than it is producing at point B. Consumer Goods (Pizza) 100 A 90 Cost = 40 pizzas B 50 Benefit = 20 robots Capital Goods (Robots) 25 45 50

Marginal Rate of Transformation (MRT) Consumer Goods (Pizza) For robots production to be increased, pizza production must necessarily fall. The marginal rate of transformation of pizza for robots shows the rate at which the economy can transform pizza to robots. It is the absolute value of the slope of the production possibilities curve. MRT = -R / P 100 A 90 Cost = 40 pizzas B 50 We have to shift / transfer 40 units of pizza to 20 units of robots more / to the prodution od robots. Minus here shows that we give up certain product at certain level . We deside to produce less / fever units of pizza. We can calculate MRT by dividing … Benefit = 20 robots 25 45 50 Capital Goods (Robots)

Marginal Rate Of Transformation The rate at which one good must be sacrificed in order to produce a single extra unit (or marginal unit) of another good, assuming that both goods require the same scarce inputs. The marginal rate of substitution is tied to the production possibilities frontier (PPF), which displays the output potential for two goods using the same resources. To produce more of one good means producing less of the other because the resources are efficiently allocated.

Good Y In the linear case the slopes at all points are identical point by point. If we want to produce one more good X the slope is exactly same to the quantity we should give up. Every time a given number of resources is shifted from good Y to X, 10 units of good Y are given up in return for 10 units of good X. 60 50 40 30 20 10 10 20 30 40 50 60 Good X

In the bowed case they are different point by point. In reality, resources are unlikely to be equally productive in both industries. Some equipment may be designed specifically for some types of production rather than others. Some employees may not be able to transfer their skills easily from one sector to another. This may lead to diminishing returns to a factor. This means that every time a given number resources is transferred from industry Y to industry X, finally fever units of good Y are produced. Good Y 40 32 20 The slopes at all points are different. By another ten unit ( o kolejne 10 jedn.) from industry Y to industry X The cost of this operation is hight thab in the previous period 10 20 30 Good X

Law of Increasing Relative Cost As society attempts to produce more units of certain good, the opportunity cost of additional units of that good generally increases. With what I have already presented / talk about there is … closely connected It was shown / wsa described in those last picture

Attainability of Production Level Since the PPF shows the limits to outputs of our economy, we can see directly, which outputs levels are attainable and which ones are unattainable. Good Y Attainable Unattainable Attainable Attainable Where we are talking about PPF we also have to mention / describe/ show .. Over Below As you remember this PPf means / stands for Good X

Efficiency and the PPF According to the PPF points A and B - appearing on the curve – represent the most efficient use of resources by the economy. Point C represents an inefficient use of resources, while point D represents the goals that the economy can not attain with its present levels of resources. D Good Y Efficient Unattainable A C Inefficient Efficient B Placed on / which are on the curve Good X

Efficiency Efficiency is getting the most from available resources. The case in which a given level of inputs is used to produce the maximum output possible. The situation in which a given output is produced at minimum cost. The condition in which there is no possibility to rearrange production inputs which means we can not increase the production of one good without decreasing the production of another good.

Inefficiency Waste and mismanagement are the results of a firm’s operating below its potential. Sometimes, inefficiency results from mismanagement of the whole economy instead of mismanagement of individual private firms. Is the situation when ..

Reasons for the Inefficiency Typically countries aren’t operating along the PPF. Reasons: Un-/underemployment, Resources or capital not used efficiently / is waste Not the best technologies are applied More fundamentally: Imperfect information Uncertainty Laws and regulations Market failures Guess – zgadywać, precise information Might buy/ want Create new jobs/ workplace changes in laws are not convienient for producers It affects / in influence

So the PPF reflects all the points at which we use our resources optimally / efficiently, so that we cannot increase our output while keeping inputs (labor, capital, technologies …) constant.

The location of any economy depends on the choices by all agents in society. Every household and firm demands certain goods and services. Demand informs firms which products they can shall supply and process form according to demand and supply. Consumer Goods (Pizza) 100 90 50 Capital Goods (Robots) 25 45 50

Changes in the PPF Consumer Goods (Pizza) The PPF is determined by all production inputs: labor, capital, technology, resources. An increase in one or more of them will shift the PPF out. Unattainable with current resources and technology 100 a d 90 Cost = 40 pizzas policy c b . 50 Inefficient – unemployed resources Which seems quiet natural / obvious Benefit = 20 robots 25 45 50

The PPF and Economic Growth Consumer Goods Economic Growth = (change in GDPt) (change in GDPt-1) GDP at t GDP at t-1 Economic Growth Are becoming attainable At lower cost of production Are not necessary Earlier – wczesniejszy Later - późniejszy Capital Goods

Economic Growth Economic growth is an increase in the total output of an economy. It occurs when a society acquires new resources or when it learns to produce more using existing resources.

Reasons for Economic Growth Physical capital – use capital more efficiently or add new capital. Human capital / labor – use labor more efficiently: educate/ train. Technology – use existing or new technologies to reorganize production in a better way. Resources – use more resources or use resources more efficiently. Entrepreneurship – create incentives for investements: improving business environment, start up capital. In other words

Literature Gillespie, Andrew (2007). Foundations of Economics, The production possibility frontier (curve): the PPF or PPC, Oxford University Press.