Session 4 Changes in PPC PDF

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Economics: Theory of Supply and Demand...

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Session 4 Changes in Production Possibility Frontier

Slope of production possibility frontier?

 The slope of production possibility frontier (PPF) represent the “opportunity cost”  Slope = Change in Y (∆Y) / change in X (∆X) =Opportunity cost

 Increasing Opportunity Cost



 When moving from left to right if the slope is increasing the opportunity cost is increasing  When opportunity cost is increasing the production possibility frontier is bowed out ward (concave to the origin)

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Constant Opportunity Cost

When moving from left to right if the slope is a constant the opportunity cost is constant When opportunity cost is constant the production possibility frontier is a downward sloping straight line

Decreasing Opportunity Cost

When moving from left to right if the slope is decreasing the opportunity cost is declining When opportunity cost is decreasing the production possibility frontier is bowed inward or convex to the origin

Feasible and infeasible

combinations

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Economic growth

We can use PPF to explain economic growth Economic growth is represented by a SHIFT in PPF In a positive economic growth the economy can produce more of both goods which are producing.

Reasons:  Number of resources has been increased  A positive change in technology  Change in Trade

Shift in Production Possibility frontier For simplicity assume constant opportunity cost PPF; 1. Increasing resources  E.g: increasing number of workers (Labour) in the economy

2. Destroying resources  E.g: decreasing number of workers (Labour) in the economy

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3. Increase in technology in production  E.g: increasing technology used in wheat production

4. Outdated technology in production  E.g: outdated technology used in wheat production

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5 . Increase in technology in production  E.g: increasing technology used in butter production

Practice questions

1. Explain the relationship between opportunity cost and production possibility curve. 2. Define opportunity cost. Why does opportunity cost increase along the production possibility frontier? Explain using an appropriate example. 3. “Shape of the production possibility curve depend on the opportunity cost” Do you agree with this statement? Justify your answer. 4. Explain these situation in increasing opportunity cost PPF with food and clothes a. An increase in population b. Increase in technology in clothes production c. Decrease in demand for food d. Ethnic war in the economy e. Many workers unemployed

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