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In fact, the marginal rate of transformation measures the tradeoff of producing more X in terms of Y. This frontier determines the maximum output of both X and Y that can be obtained given the technology. Production at point A will produce more quantity of Y and less of X than production at point B. However, both are technically efficient, since they maximize the output.
For example, production at point C is technically inefficient because, at any point on the PPF, more combined output is produced using given the technology. Also, point D is unattainable given the technology, being this is the reason why it is outside the PPF. The PPF can be derived from the contract curve on an Edgeworth box.
A production–possibility frontier (PPF) or production possibility curve (PPC) is a curve which shows various combinations of the amounts of two goods which can . PDF | On Jan 1, , C. A. K. Lovell and others published Production Frontiers and Productive Efficiency.
In this box, we see the quantity of inputs K, L being used in the production of each good X,Y. In fact, we can see how, for each quantity of each product, the quantity of each input can change. The isoquants green curve for X, red for Y determine how much a certain input has to increase in order to compensate the decrease in the other input, maintaining the quantity of output produced unaltered.
On the other hand, point Y, as we mentioned above, represents an output level that is currently unattainable by this economy. But, if there were a change in technology while the level of land, labor and capital remained the same, the time required to pick cotton and grapes would be reduced. Output would increase, and the PPF would be pushed outwards. A new curve, represented in the figure below on which Y would fall, would then represent the new efficient allocation of resources.
When the PPF shifts outwards, we can imply that there has been growth in an economy. Alternatively, when the PPF shifts inwards it indicates that the economy is shrinking due to a failure in its allocation of resources and optimal production capability. A shrinking economy could be a result of a decrease in supplies or a deficiency in technology. An economy can only be producing on the PPF curve in theory; in reality, economies constantly struggle to reach an optimal production capacity. And because scarcity forces an economy to forgo some choice in favor of others, the slope of the PPF will always be negative; if production of product A increases then production of product B will have to decrease accordingly.
The Pareto Efficiency states that any point within the PPF curve is considered inefficient because the total output of commodities is below the output capacity. Conversely, any point outside the PPF curve is deemed impossible because it represents a mix of commodities that will require more resources to produce than are currently obtainable. Therefore, in situations with limited resources, the only the efficient commodity mixes are those lying along the PPF curve, with one commodity on the X-axis the other on the Y-axis. An economy may be able to produce for itself all of the goods and services it needs to function using the PPF as a guide, but this may actually lead to an overall inefficient allocation of resources and hinder future growth — when considering the benefits of trade.
Through specialization , a country can concentrate on the production of just a few things that it can do best, rather than dividing up its resources among everything. Let us consider a hypothetical world that has just two countries Country A and Country B and only two products cars and cotton. Suppose that Country A has very little fertile land and an abundance of steel available for car production. Country B, on the other hand, has an abundance of fertile land but very little steel.
If Country A were to try to produce both cars and cotton, it would need to divide up its resources, and since it requires a great deal of effort to produce cotton by irrigating its land, Country A would have to sacrifice producing cars — which it is much more capable of doing. The opportunity cost of producing both cars and cotton is high for Country A, as it will have to give up a lot of capital in order to produce both. Similarly, for Country B, the opportunity cost of producing both products is high because the effort required to produce cars is far greater than that of producing cotton.
Each country in our example can produce one of these products more efficiently at a lower cost than the other. Now let's say that both countries A and B decide to specialize in producing the goods with which they have a comparative advantage. If they then trade the goods that they produce for other goods in which they don't have a comparative advantage, both countries will be able to enjoy both products at a lower cost. Furthermore, each country will be exchanging the best product it can make for another good or service that is the best that the other country can produce so quality improves.
Specialization and trade also works when several different countries are involved. For example, if Country C specializes in the production of corn, it can trade its corn for cars from Country A and cotton from Country B.
Determining how countries exchange goods produced by a comparative advantage "the best for the best" is the backbone of international trade theory. This method of exchange via trade is considered an optimal allocation of resources, whereby national economies, in theory, will no longer be lacking anything that they need.
Like opportunity cost, specialization and comparative advantage also apply to the way in which individuals interact within an economy. Sometimes a country or an individual can produce more than another country, even though countries both have the same amount of inputs. For example, Country A may have a technological advantage that, with the same amount of inputs good land, steel, labor , enables the country to easily manufacture more of both cars and cotton than Country B.
A country that can produce more of both goods is said to have an absolute advantage. Better access to quality resources can give a country an absolute advantage as can a higher level of education, skilled labor, and overall technological advancement. It is not possible, however, for a country to have an absolute advantage in everything that it produces, so it will always be able to benefit from trade.
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Economy Economics. Key Takeaways In business analysis, the production possibility frontier PPF is a curve illustrating the different possible amounts that two separate goods may be produced when there is a fixed availability of a certain resource that both items require for their manufacture.