Production Possibility Curve: Definition And Graphical Representation

What is Production Possibility Curve (PPC)?

Describe about the Production Possibility Curve or Production Possibility.

1. Production Possibility Curve or Production Possibility Frontier (PPF) shows the possible combinations of production of two goods. It is a graphical representation of an economy’s output, which shows the efficient use of resources available in the economy. The assumptions for creating a PPF are: there are two goods being produced in the economy, the resources and technology is constant. The availability of factors of production is also limited, which is divided in two goods’ production process (Manning, 2014).

A PPF is constructed in the Figure 1 where, the two goods produced in the economy are butter and mobiles.

Figure 1. PPF curve of butter and mobiles

Source: As created by the author.

The X axis shows production of mobiles and the Y axis shows production of butter. The points X, Y, and Z represent most efficient application of available resources in the economy. Increasing production of butter by moving from point Z to point X will decrease production of mobiles. To increase the production of one good the economy has to sacrifice producing another good, as the available resources are being transferred to the other goods’ production. This sacrifice of producing mobiles is called ‘opportunity cost’. If there were abundance in resources, increasing production of butter would not require the sacrifice of production of mobiles. But in reality, resources are scarce. This is why; production of one good requires resources from the other production process. The scarcity of resources is the reason of the PPF curve being concave (Mankiw, 2014).  

The points X, Y, and Z shows the efficient points as the resources are used efficiently to achieve that amount of production. The point A represents inefficiency in production process as the production process is not able to absorb all the available scarce resources. Any point under and on the concave curve represents “attainable points” as the producers of the economy can use variation in resource allocation to attain those points. Those points outside the PPF curve, for example B, are called “unattainable points” as no combination of resource allocation will be enough to reach these points (Baumol, & Blinder, 2015).

The only way to achieve production on point B is rise in available resources or change in technology. A new technology will decrease the cost of production and more resources will be available. This will move the curve outward. If there is a decrease in resources or ‘loss’ in technology the curve will shift inward.

Graphical Representation of PPF (Production Possibility Frontier)

Figure 2. Shift of PPF curve.

Source: As created by author.

In the figure above, PPF1 is the primary Production Possibility Frontier. Assuming the available technology got improved, the PPF curve shifts outward to PPF2. Now the two goods economy can use the same amount of resources to produce more butter and mobiles. Now, if there was a shortage in resources, the PPF curve would have shifted inward to PPF3. In this case, the production process loses the ability to produce at the same amount before as the points X, Y, and Z now unattainable. Here, fewer amounts of mobiles and butter can be produced. If the available technology goes backward, which is less likely, the PPF curve will shift to the left (Kato, 2016). 

2. A market is called perfectly competitive when there are a large number of producers and sellers. Because of this huge number no one can influence the market. The price is equal to the marginal cost of production. Increase of price in one seller’s product will make the producer lose the market demand. The price of the products is perfectly elastic. It means, a small change in price will have a large impact on demand (Koschker, & Möst, 2015).

The family farmers of Australia sell their products at a certain price. Import of vegetable products in the country is reducing their price. The cost of production for the family farmers is still the same. They are in a perfectly competitive market. In case of a competitive market a seller sets his price at his marginal cost of production. The super markets, which are selling the imported goods are changing the price for the vegetable products. This makes the market for the family farmers tough to exist. Products being sold by family farmers will be costlier than the price of vegetables which are being imported in Australia. The local farmers are thus leaving their jobs and moving out of their lands (Aussie Farmers Direct, 2016).  

Due to this uneven competition, since 1981 the number of farmers dropped by 40 percent. In Tasmania, there are now about 5,000 farms, contrasted with 7,200 about 30 years ago. About one-fourth of Tasmania is currently committed to farming, compared with 50 percent of Victoria and 80 per cent of Queensland (Joyce, 2014).

Figure 3. Perfectly competitive market.

Source: As created by the author.

In the figure above, P₁ is the price level where the local farmers are operating. The super markets are offering price P_2. This shifts the supply curve downward from Supply 1 to Supply 2. Theoretically, no one will buy vegetables from the people charging P_1. The number of producers will decrease as they cannot meet their cost of production. In the case of Australian farming market, those farmers who can meet their production cost level at the price level P2 will only remain in the market (Rios, McConnell, & Brue, 2013).

Movement Along the Curve

Price in a perfectly competitive market is extremely elastic. This means, a change in price will shift the demand pattern largely. The local have no influence over the market price. As their selling price is higher than the products in super markets, people are not buying from them. Perfectly competitive market also implies homogeneous goods are being sold in the market. So farmers cannot sell their products as their desired price is greater than that of the super markets (Burkhard, Kroll, Nedkov, & Müller, 2012).

Australia is importing vegetables at a cheaper rate making the price lower than that of local farmers pushing farmers out of their lands. Vegetable growing operations have dropped since 2014-15 by 15 percent. According to Mr. Kruup, “what we as an industry need to do, is we need to look at ways in which growers can reduce their production cost and increase their competitiveness against foreign imports” (Mkomwa, Kaumbutho, & Makungu, 2015).

Pokémon Go is a "location-based augmented reality game". It was created by Niantic for iOS and Android operating systems. The vital parts of the game are played through mobile phones' GPS system. Pokémons, i.e. virtual creatures appear on the screen as if they were at the real-world location as the player. The game has gotten both positive and negative reviews. The game has both positive and negative external effects (Cordato, 2013).   

The negative external effects associated with Nintendo’s Pokémon go Application (NPA) are:

Accidents/ losing awareness of the surroundings: Players of Pokémon go often lose awareness of their surroundings while walking on the road with heavy traffic or walking by the edge of a roof. Several reports came in which described Pokémon go as the reason for accident.

Breaking the law: One of the attractions of the game is “real world location”. To find and catch Pokémons, people often go through places where trespassing is prohibited. The players often break laws in order to get their desired creatures.

Losing sense of time: The game needs concentration. People playing the game lose sense of time while playing, and often forget about important stuffs. No matter which time it is, people starts hunting Pokémons with a phone in hand often make others’ life hard.

Security vulnerability for the players using Google accounts for the game: The game requires the players to log in through their Google accounts. The game can access all the details of the account. This makes the security of the players’ information vulnerable.

Shifts in PPF

Planned robberies: There were many reports of robbers using the Pokemon go app to lure in potential victims. They wait for the Pokemon go players in deserted places and rob them

People going into business for capturing Pokémon and not supporting the businesses: One of the objectives of the game is to make sure that people go to places like local shops. This will help the small scale businessmen to sell their products. This way the app is targeted to support them. But the players going into business for catching Pokémons are often not buying anything.

Losing sleep over night: People losing track of time often leads them to miss their schedule. The players stay awake to catch Pokemons. This causes serious health issues.

Server tends to crash due to huge signings: With a large number of people logging in for the game often leads the server to crash. It requires resources to get the server back to its functional form again (Dudley-Nicholson, 2016)

B) A negative externality is the cost of a third party's suffering, which is the result of a transaction of two economic agents. People affected due to this transaction indirectly are the victims of negative externalities. A negative externality causes social costs. Demand curve gets higher than the social benefits, or the social costs get higher than the supply curve in a demand-supply model due to negative externalities. The presence of negative externalities makes the market outcome inefficient and diverts from the optimum point of society. The output of the market is greater than the social optimum when negative externality occurs. An economically efficient economy produces more goods than an inefficient one (Henderson, 2014).  

In the case of a presence of a negative externality, third parties experience adverse effects of an economic transaction, which they are forced to be involved. The market as a whole reduces its profits to repair the damage caused by the negative externalities. The market uses additional reserves to make up for the costs incurred. This is the reason the market becomes inefficient. To maximize economic efficiency, the authorities have to ensure the market failures and imperfections are reduced (Lin 2014).

References:

Aussie Farmers Direct,. (2016). Family farmers continue to be pushed off the land. | Aussie Farmers Direct. Aussie Farmers Direct. Retrieved 3 September 2016, from https://www.aussiefarmers.com.au/page/our-story-slash-home-truths-slash-food-manufacturing-in-australia

Baumol, W. J., & Blinder, A. S. (2015). Microeconomics: Principles and policy. Cengage Learning.

Burkhard, B., Kroll, F., Nedkov, S., & Müller, F. (2012). Mapping ecosystem service supply, demand and budgets. Ecological Indicators, 21, 17-29.

Cordato, R. (2013). Welfare economics and externalities in an open ended universe: A modern Austrian perspective. Springer Science & Business Media.

Dudley-Nicholson,. (2016). Do you want Pokemon Go with that? Aussie businesses trading on apps. NewsComAu. Retrieved 3 September 2016, from https://www.news.com.au/technology/home-entertainment/gaming/apps/how-nintendos-pokemon-go-app-is-helping-australian-business-but-hurting-some-of-its-users/news-story/08ec2f37376f516c0bce662aab4b8ef4

Henderson, J. V. (2014). Economic theory and the cities. Academic Press.

Joyce, B. (2014). Canberra observed: Our farmers under siege from government policies. News Weekly, (2935), 3.

Kato, H. (2016). Population Growth and Technological Progress—From a Historical View. In An Empirical Analysis of Population and Technological Progress (pp. 1-19). Springer Japan.

Koschker, S., & Möst, D. (2015). Perfect competition vs. strategic behaviour models to derive electricity prices and the influence of renewables on market power. OR Spectrum, 1-26.

Lin, S. A. (Ed.). (2014). Theory and measurement of economic externalities. Academic Press.

Mankiw, N. G. (2014). Principles of macroeconomics. Cengage Learning.

MANNING, R. (2014). production-possibility frontier. Production Sets, 51.

Mkomwa, S., Kaumbutho, P., & Makungu, P. (2015). Farm Machinery for Conservation Agriculture. In Conservation Agriculture (pp. 109-131). Springer International Publishing.

Rios, M. C., McConnell, C. R., & Brue, S. L. (2013). Economics: Principles, problems, and policies. McGraw-Hill.