Explain how production possibility curves can be used to show scarcity, choice, and opportunity cost.
A production possibility curve shows the combinations of two or more goods that can be produced using all available resources efficiently.
A PPF is normally drawn as concave to the origin because the extra output resulting from allocating more resources to one particular good may fall. This is known as the law of diminishing returns and can occur because factor resources are not perfectly mobile between different uses, for example, re-allocating capital and labour resources from one industry to another may require re-training, added to a cost in terms of time and also the financial cost of moving resources to their new use.
How does a production possibility curve show:
- Opportunity cost
Shifts in the PPF
The production possibility frontier will shift when:
(a) There are improvements in productivity and efficiency (perhaps because of the introduction of new technology or advances in the techniques of production)
(b) More factor resources are exploited (perhaps due to an increase in the available workforce or a rise in the amount of capital equipment available for businesses to use)
In our example illustrated in the second diagram below we see the effects of a change in the state of technology in supplying MP3 players which causes an outward shift in the PPF. With the same resources allocated to DVD players, a greater output of MP3 players is possible. The real cost of MP3 players will fall – there has been a change in the opportunity cost
Using a production possibility curve illustrate the OC the Government face when chossing between spending on education or defence, given it's limited budget.
Where is the optimum allocation of resources?
Will the PPF be impacted in the long run by this choice?
What should the government spend money on to improve it's current PPF position?