Question

Create a tutorial that explains what the Production Possibilities Frontier is and what causes it to expand and what causes it to contract.

Answer 1

Production possibility curve shows different combination of two goods which can be produced with the given resources on the assumptions that (i) resources are fully and efficiently utilized, and (ii) technique of production remains constant.

Growth of Resources:

Owing to increase in resources, PPC shifts to the right. It shows higher level of output of both the goods. Thus, PP shows higher level of output than AD.

Change in technology:

a) Efficient technology for the production of commodity X: Efficient technology for the production of commodity X would mean more production of X with the same resources. Accordingly, PPC would rotate:

b) Efficient technology for the production of commodity Y: It would mean more production of Y with the same resources. PPC rotate outward rather than shift;

c) Efficient technology for the production of both X and Y: It would mean greater production of both X and Y with the same resources. PPC would shift to the right as shown below

Deteriorate of resources shifts PPF leftwards.