Production Possibility Curves (PPC)

Definition

A PPC shows the maximum combination of goods and services that can be produced by an economy in a given time period, given that the resources are fully and efficiently utilized, and the state of technology is fixed

Explain graph

Point X shows the maximum quantity of good X that can be produced.Point Y shows the maximum quantity of good Y that can be produced.Point Z, or any where on the PPC, shows the maximum combination of good X and good Y that can be produced.Point A, or any where inside the PPC, means that the economy is not fully utilizing the resources. There maybe Idle resources or inefficient production.Point B, or any where outside the PPC, is not attainable at the present moment in time.

Relationship with

Scarcity

PPC shows a limit on the maximum amount of goods that can be produced, which is insufficient to satisfy human unlimited wants. PPC shows a limit on the resources since that is a maximum combination of goods that can produced, which is insufficient to satisfy unlimited human wants

Choice

PPC illustrates an economy has to decide what to do with its resources. It has to determine how much to produce for each good.

Opportunity Cost

Opportunity cost can be graphically illustrated  by the PPC.Point A: zero unit of good X and 100 units of good YPoint B: 1unit of good X and 90 units of good YOpportunity cost of producing the first unit of good X = 100-90 good Y

Shifts

Potential Growth

Actual Growth

Reason? Improvement in quantity or quality of factors of production in the economyRepresentation? Outward shift of PPCEffects?Maximum combination of goods and services that can be produced by the economy increases, production capability increases

Reason? Previously unemployed factors of production are brought into Representation? Shift of a point inside the PPC to a new point nearer the PPCEffects?The economy increases its amount of production

The Law of diminishing marginal return

Definition

The law of diminishing marginal returns states that when variable factors are added continuously to a given quantity of fixed factors, marginal product will eventually decrease.

Explanation

Explanation

At the beginning of the production process, only one worker is employed-impossible to carry out division of labour-fixed factors are not fully utilizedMore workers are employed-division of labour can be adopted-factors of production are more fully utilized-raise productivityProduction will reach a point where all machines are fully utilized.-Additional workers will have no machineries to use and the working environment will become too congest-Marginal product will decrease

Economies of scale and diseconomies of scale

Definition

Definition

Economies of scales refers to any decreases in the long-run average costs when a firm alters all of its factor of production in increasing its scale of production.

Diseconomies of scales refers to any increases in long-run average cost when a firm alters all of its factor of production in increasing its scale of production.

Explanation

When all factors of production are increased, total cost increases. The percentage rate of increase in output is larger than the percentage rate of increase in total cost Average cost falls

When all factors of production are increased, total cost increases. The percentage rate of increase in output is smaller than the percentage rate of increase in total cost Average cost increases

Reason

Types

Internal Economies of scale-This term describes the fall in average cost enjoyed by the firm when the firm itself enlarges its scale of production.

External Economies of scale-This term describe the fall in average cost enjoyed by the firm when there is an overall increase in size of the industry.

Internal Diseconomies of scale-This term describes the increases in average cost experienced by the firm when the firm itself enlarge its scale of production.

External diseconomies of scale-This term describe the increase in average cost experienced by the firm when there is an overall increase in size of the industry.

Economies of scale

Diseconomies of scale

Managerial EOS Purchasing EOS Technical EOS Marketing EOS Financial EOS Productivity increases, LRAC decreases

Sharing of advanced technology(technology spillover) Demand of raw material increases Special trainning facilities

Labour increases, co-ordination problem More dominant, less incentive to cut cost individual workers feel insignificant contribution

Demand increases, higher price Traffic congestion

PPC

LDMR

EOS and DEOS