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Production Possibilities Curve
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<html xmlns="http://www.w3.org/1999/xhtml" lang="en"> <body class="calibre"> <p class="block_"> </p> <p class="block_"> </p> <p class="block_"> </p> <p class="block_"> </p> <p class="block_"> </p> <p class="block_"> </p> <p class="block_"> </p> <p class="block_1">Title: </p> <p class="block_1">Student’s Name:</p> <p class="block_1">Institution:</p> <p class="block_1">Course:</p> <p class="block_1">Date:</p> <p class="block_"> </p> <p class="block_"> </p> <p class="block_"> </p> <p class="block_"> </p> <p class="block_"> </p> <p class="block_"> </p> <p class="block_"> </p> <p class="block_2"> </p> <p class="block_3">Q 1. </p> <p class="block_3">Definition</p> <p class="block_4">Production possibility curve (PPC) is a graphical presentation of goods or services that are produced by a firm using similar resources in the economy (Investopedia, 2014). In this case, the production of one product or service directly affects the production or the even the quantity of the other production. To illustrate this, take an example of two producing firms i.e. T and Q Company which are producing two types of machines A and B; an increase in the production of one of the product will be accompanied by a decrease in production of the other product. Production of machine A will be directly affected by the production of machine B and vice versa. The relationship is in the inverse relation. This is because it will cause a decline in the production of B if more of A has to be produced. Now the main task of the manager as the decision maker is to determine which amount of which product to produce in order to maximize the returns. There is also a need to be certain of the opportunity cost incurred by foregoing or substituting some of the products to be produced (Davis, 2014). This scenario is as demonstrated in the graph below; </p> <p class="block_4">As indicated in the graph, for the economy to produce more of M, it must reduce some of the resources required in the production of N (point a). If the economy starts making more N (designated by points b and c), it means that the economy will have to divert their resources from producing M and hence, a smaller amount of M will be produced than it was manufactured at point a as indicated in the graph. Moving production from point a, to point b, it implies that the economy will have reduce production of M though with a small amount as compared with the increase in N production. This is similar to the statement of the law of diminishing marginal rate of technical substitution (MRTS). Equally, if the economy shifts from point b to c, the output of M will be considerably condensed or decreased while the increase in production of N will be quite small (Davis, 2014). It is important to note that a, b, and c are indicating the most efficient allocation of the resources in the economy. Hence, one of the major application of the PPC is in making decision of the optimal combination to be used in production. This implies that, if in one point more of M is demanded and is to be produced, then the cost of producing the additional output is proportional to decreased production of N. <br class="calibre1"/><br class="calibre1"/> <span class="tab"> </span>At Point S, the resources in the economy are not fully utilized or are being used inefficiently and therefore the country is not producing enough N or M given the potential of its resources. On the other hand, point T represents a level of output that is unattainable in the current economy. Nevertheless, if technological changes occurs while other factors are held constant, the time and other resources required in producing product N and M would decrease. The output would increase, and the PPC would be pushed outwards that is, it shifts to the right. A new curve after the shift would therefore represent the new efficient allocation of resources (Investopedia, 2015).</p> <p class="block_"> </p> <p class="block_3">Q 2. </p> <p class="block_3">Factors that could make a nation’s production possibilities curve shift inward</p> <p class="block_4">Any production possibility curve of the nation may shift outward due to several factors whereby some are as indicated below;</p> <p class="block_4">Technological advancement and economic growth are the two common factors that can result to an outward shift, that is, shifts toward right of the PPC (Davis, 2014). Invention of a more efficient machine in the manufacturing of maize flour will lead to an increase in the productivity of the maize flour produced by the respective firms hence a right shifts in the production possibility curve (Investopedia, 2015). An outward shift may also occur due to economic growth. Economic growth will make the production of capital goods more and more easily which in turn leads to an increase in production of the consumer goods. A well enhanced capital market will lead to production of more capital goods. Similarly a strong labour market will lead to high efficient services in the country’s market. This is as illustrated in the graph below; </p> <p class="block_5"></p> <p class="block_3">Q 3. </p> <p class="block_6"><b class="calibre3">How can an economy achieve points that are outside the production possibilities curve</b>?</p> <p class="block_4">The following are some of the ways of achieving points outside the production possibility curve, point T;</p> <p class="block_6">Specialization and competitive advantage-by specializing a country can concentrate on the production of one thing that it can do best it was helps the firm in enjoying the economies of scale resulting from large production (Davis, 2014).</p> <p class="block_6">Taking debt finance- a loan can be obtained from the World Bank or international monetary fund (IMF) to finance more production. This will go along by enhancing the country resources hence more production ability which shifts the curve outwards. </p> <p class="block_6">Engaging on international trade- this help in expanding the operations abroad thus, it will facilitate the country production ability by helping it concentrate more on what it can best produce (Arnold, 2011).</p> <p class="block_6">Invest in international securities like Euro bonds- this will help add the country resources hence more production. More returns will be achieved at a minimum risk.</p> <p class="block_6">Enhancement of the production technology- production will mainly depend on the level of technology. Enhancing technology in production will enable the country to produce more efficiently and effectively (Arnold, 2011). </p> <p class="block_6">Facilitating economic growth- growth in the economy will lead to better and more efficient production methods hence more production.</p> <p class="block_6"> More enhanced training of labour force- training the labourers or the work force will lead to more efficient production and this alternatively will lead to enhancement in the production processes (Arnold, <span class="calibre4">2011). </span></p> <p class="block_6"> </p> <p class="block_3">Q 4. </p> <p class="block_6"><b class="calibre3">Opportunity cost of increasing farm production by 10 tons</b>.</p> <p class="block_4">The opportunity cost is equals to the forgone factory goods (Davis, 2014). Increasing firm goods from point b to c by 10 tons leads to a decrease of Factory goods from 700 to 650 thus, a decrease of 50 tons. This means that the cost of producing an extra 10 tons in firm goods is equivalent to the producti<span id="id_GoBack">on of 50 tons in factory goods. </span></p> <p class="block_4">That is, (700-650) =50<span class="calibre4"> </span></p> <p class="block_3">Q 5. </p> <p class="block_3">Movement b-c and e-f comparison</p> <p class="block_4">The opportunity cost between e-f is greater than the opportunity cost between b-c. This means that for as to produce farm goods at its maximum point, we have to forgo too much production of factory goods. This implies that, firm goods are substituted with much of factory goods. From the graph above, an increase by 10 tons of firm goods from point e-f leads to a decrease of 300 tons of factory goods. </p> <p class="block_7"> </p> <h1 class="block_8" id="toc_id_1">References</h1> <p class="block_9">Investopedia. (2015). <i class="calibre5">Production Possibility Frontier</i>. Retrieved February 07, 20105, from Investopedia: http://www.investopedia.com/terms/p/productionpossibilityfrontier.asp</p> <p class="block_9">Davis, M. (2014). Economics Basics: Production Possibility Frontier, Growth, Opportunity Cost and Trade. Retrieved February 07, 2015, from http://www.investopedia.com/university/economics/economics2.asp</p> <p class="block_10"> </p> <p class="block_5">Zellner, Arnold (2011), <i class="calibre5">An Introduction to Bayesian Inference in Econometrics</i>, New York: Wiley.</p> <p class="block_"> </p> <p class="block_3"></p> <p class="block_"> </p> <p class="block_11"> </p> <p class="block_"> </p> <p class="block_10"> </p> </body></html> ">
