Economics Paper on Production Possibility Frontier

Economics Paper on Production Possibility Frontier

A production possibility frontier (PPF) represents the possible combination of the production of 2 goods, given that resources are efficiently allocated. It indicates the maximum output for goods affected by similar inputs, resources and factors. In addition, the frontier makes a postulation that every input resource is put into good use. It can be concluded that businesses should put their resources into more efficient production methods to ensure they can reach higher efficiency and output levels of chosen goods at the cost of production of another good.

The diagram below demonstrates the PPF in respect to pizza and sugar. Points A, B and C demonstrate the arc of output produced with fixed resources in place. These points represent the maximum and efficient use of resources. There is a matching decrease in output with increased manufacture of one commodity output instead of another. It infers that a company can only add or increase its production for a particular good and service in the event a corresponding reduction takes place for another products. The reason behind this is that resources are scarce and the company is trying their best to maximize profits with the available resources. There are assumptions that there is efficiency in resource utilization, constant technological development and only two choices of commodities. This limits an organization to make choices in regards to production activities.

Figure 1. Production Possibility Frontier (PPF) (Nixon 55).

Inefficient, Efficient and Non-Feasible Point

Inefficiency in utilization of resources comes about as a result of underutilization of resources or misuse of these scarce resources. Moreover, the company or organization may be unable to tap its full potential and serve the market by manufacturing enough products. In the event an organization underperforms or spends resources on one commodity at the expense of another, inefficiency is deemed to occur. This is represented by points D and E under the curve in the PPF graph. Efficiency appears at all points along the curve. This means that the two commodities take appropriate share and proportion of the resources available. Therefore, the company is able to balance its activities in the production of the items. As a result, the company is able to benefit from these activities. Point A, B and C represents the maximum point or curve that depicts that there is optimal utilization of assets (Nixon 100). Lastly, we have the non-feasible point F which goes beyond the curve. This means that the production output set by an organization is unachievable at the current availability of resources. The reasons behind this include improper combination of resources and scarcity of assets. Improper combination refers to the allocation of resources that are inadequate to the production of two goods. The company or entity may end up not achieving its goals due to an ambiguous objective.

Constant Opportunity Cost and Increasing Opportunity Cost

An opportunity cost is the price paid by an entity for substituting or decreasing production of a commodity in favor of another. Increasing opportunity cost denotes that foregone manufacture of goods increases in the event quantity increases. This insinuates that the value that could have been achieved by the entity through production proportionally increases with quantity. Constant opportunity cost on the other stands for a foregone business or chance to do business. This indicates that an organization is slow or ignores diversification as a way of investing. In addition, it is failure to utilize or take advantage or prevailing market opportunities to make profit for the business.

 

Works Cited

Nixon, Refugio. Production Economics. New Delhi: World Technologies, 2012. Print.