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Production Possibilities Frontier

 Production Possibilities Frontier

         Even though actual economies manufacture thousands of commodities and services lets presume that a nation’s economy manufactures only two commodities such as automobile and electronics. Altogether, the automobile industry uses all the factors of production.

         The production possibilities frontier is a diagram that presents the various combinations of productivity – in this crate, automobiles and electronics; the economy can feasibly manufacture given the accessible factors of production and the accessible manufacturing technology that industries can use to turn these factors to productivity. Let us discuss with an example.

  1. The diagram presents the nation’s economy’s production possibilities frontier. If the economy uses all its resources in the automobile industry, it can manufacture 2500 autos and no electronic commodities.

  2. If it uses all its resources in the electronics manufacturing, it can manufacture 7500 electronic commodities and no autos. The two terminating points of the production possibilities frontier represent these extreme possibilities.

  3. More frequently, the economy divides its resources amidst two organisations and this capitulate other points on the production possibilities frontier. For instance, it can produce 1500 autos and 5500 electronic commodities represented in the diagram by point G.

  4. On the other hand, by shifting some of the factors of production to the automobile enterprises from the electronic commodities enterprises, the economy can manufacture 1750 autos and 5000 electronic commodities denoted by point H.

  5. As resources are in short supply, not every conceivable outcome is possible. For instance, no matter how inputs are distributed amidst two organisations, the economy cannot manufacture the volume of autos and electronic commodities denoted by point I.

  6. Provided the technology accessible for manufacturing autos and electronic commodities, the economy merely does not have sufficient factors of production to assist that level of productivity.

  7. With the volume of inputs had, the economy can manufacture at any point on or inside the production possibilities frontier, however it cannot manufacture at points outside the frontier.

  8. An end product is said to be efficient if the economy is getting all it can from the in sufficient resources it has accessible. Points on the production possibilities denote efficient levels of manufacture.

  9. When the economy is manufacturing at such a point, like G, there is no way to manufacture more of one commodity devoid of manufacturing less of the other. Point J denotes an incompetent end product.

  10. For some cause, conceivably redundancy, the economy is manufacturing less than it could from the resources if has accessible: It is manufacturing only 750 autos and 2500 electronic goods. If the source of the inadequacy is eradicated the economy can hike its manufacturing of both commodities.

  11. For instance, if the economy shifts from point J to point G, its manufacturing of autos hikes from 750 to 1500 and its manufacturing of electronic commodities hikes from 2000 to 5000.

  12. When the economy shifts from point G to H, for instance, society manufactures 200 more autos but at the cost of manufacturing 400 fewer electronic commodities.

  13. The opportunity cost of an automobile in terms of the number of electronic commodities is not an invariable in this economy however is based on the number of autos and electronic commodities a nation’s economy is manufacturing. This is replicated in the shape of the manufacturing possibilities frontier.
  14. However the production possibilities frontier in the diagram is bowed outer the opportunity cost of an auto is highest when the economy is manufacturing many cars and fewer electronic goods such as at point K where the frontier is precipitous.

  15. When the economy is manufacturing few autos and many electronic commodities such as at point L, the frontier is flatter and the opportunity cost of an auto is lower.

  16. When the economy is using most of its resources to make electronic commodities such as point L, the resources best suited to auto manufacturing such as technical auto workers are being used in the electronic enterprise.

  17. The production possibility frontier simplifies a complex economy to highlight some basic however powerful notions, scarcity, efficiency, trade offs,

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