Hi everybody. Production possibility frontiers or production possibility curves are very useful tools to illustrate the ideas of scarcity and choice in economics. These curves are great because we can look at them from a micro perspective and from a macro perspective. What does the curve or the frontier actually show? Well, on a micro level, it shows us two things. The maximum possible production of two goods or services um that can be produced with a given level of factors of production. But it also tells us the curve the various combination of two goods and services that can be produced with a given level of factors of production. If we make this macro, what does a macro ppf tell us? Well, the curve tells us the maximum possible production of all goods and services that can be produced with the level of factors of production in the economy. And it also tells us again the various combinations of all goods and services that can be produced with given factors of production in the economy. Um, so there you go. That's what the curve actually represents the actual boundary. Now the beauty of these diagrams of these curves is that we can show concepts like opportunity cost like efficiency. We can understand how production can be increased of goods and services as well. So let's start by looking at how we can illustrate the concept of opportunity cost on PPFs or PPCs. Well, the shape of a ppf can tell us about the opportunity cost of producing goods and services. Let's have a look at this micro ppf. How do we know it's micro? Well, because we're looking at two specific goods. In this case, we're looking at a firm who can produce either laptops or tablets. The curve tells us the maximum possible production of both laptops and tablets. This firm can't produce beyond the curve, but it also tells us the various combinations of laptops and tablets can be produced depending on how this firm uses their factors of production. So, let's understand how we can look at opportunity costs from this PPF. Well, let's say that this firm is currently producing a A and that gives a combination of let's say 50 tablets and 75 laptops. Let's say this firm wants to specialize and produce more tablets. They want to increase tablet production from 50 to 60, i.e. reallocate factors of production to increase uh tablets. Well, you can see here that as they move from point A to point B on this PPF and they produce 10 more tablets, they have to give up some laptops. And let's say that they have given up 16 laptops. So from 75 to 60. The opportunity cost of producing 10 more tablets from 50 to 60 is the 15 units of laptops that have been foregone. But let's say that this company, this firm wants to produce 10 more tablets. So to go from 60 to 70 tablets, i.e. to move from point B to point C on the PPF. Again, they are reallocating scarce resources, reallocating their factors of production to suit more tablet production. But can you see that they are giving up more laptops to do that? Let's say that they have now reduced laptop production from 60 to 30. So the same 10 unit increase in tablets has now meant a greater opportunity cost. 30 units of laptops have to be given up to produce the same 10 unit increase in tablets. Um so a ppf curve that's drawn like this concave indicates the law of increasing opportunity cost. The more that we produce of something the more of the other thing that has to be given up each time. So a 10 unit increase in tablets each time means that more units of laptops have to be given up in each case. That's the law of increasing opportunity cost. You can see here on a micro level if we did the same exercise here on a macro ppf we would show the same thing. Now what differentiates a micro PPF to a macro PPF? Well, on a macro diagram, you would change the labeling on the axis to goods and services because nothing nothing else can be produced in an economy. So if we label our axis like this, it indicates a macro ppf. The other option for macro is to go consumer goods and capital goods. That indicates we're looking at the entire economy here. But again, any PPF drawn concave illustrates the law of increasing opportunity cost. What what does that actually mean? mean? Well, let's go back to a micro level here. It means for a business as they move towards heavy specialization in tablets, it means that their factors of production are actually more suitable towards laptop production down here on the ppf because they're increasing their production of tablets by the same amount, but they're giving up more and more and more laptops by doing so. That means that their factors of production down here on the curve are much more suited towards laptop production. Which is why when they produce more table tablets, they're giving up significantly more laptops. Whereas over here on the curve, you can see that to produce more laptops, they have to give up more and more and more tablets. That's because here factors of production are much more suited towards tablet production than they are towards laptop production. That's the basic idea. As we move further and further along the curve, factors of production are more suitable towards one thing than they are towards another thing. That explains why uh we have concave PPFs where we see the law of increasing opportunity cost takes place. What about if we draw the PPF differently? Well, let's have a look at my macro diagram here. It doesn't matter that I've done it on my macro diagram. The same concept applies even on a micro ppf. But if we draw our ppf linear downward sloping and linear like this, it illustrates constant opportunity cost. Let's take the same 10 unit increase now in services though. So 10 unit increase each time. You can see that the opportunity cost, the units of goods that are being given up are the same in each case. 20 units from 50 to 60 services and 20 units of goods from 60 to 70 services. And that will continue. If I went from 70 to 80, then the decrease would be from 60 to 40. The same basic concept here. So a linear PPF illustrates constant opportunity cost whereas a concave PPF represents increasing opportunity cost. Let's understand how we can show efficiency now on PPFs. There are three types of efficiency that we can talk about when we draw PPF curves. Productive efficiency, allocative efficiency and paro efficiency. Let's look at those on a ppf diagram. Well, you can see that I've put five points on both a micro and a macro ppf. Let's look at points A, B, and C. Points A, B, and C are on the curve in each case. Any point on the curve is productively efficient. Productive efficiency in this case simply is using up all factors of production to their maximum level. So, we're getting maximum production from all of the factors of production available. There is no waste of them. There is no unemployment of them. So, any point on the curve is productively efficient. That's very important by definition. Therefore, point D, any point inside the curve is productively inefficient. We are wasting our factors of production. We're not getting maximum use of those. So, that would be a very inefficient point of production, productive inefficiency in both cases here. What does point E represent? Point E is unattainable with our given factors of production. This firm on a micro sense can only produce at a point on the curve. They can't produce beyond the curve at point E yet with the given factors of production. So A, B and C productive efficiency. Any point on the curve is productively efficient. Any point within the curve inside the curve is productively inefficient where we are not maximizing the use of our factors of production. We are wasting them. On a macro level, point D can be known as unemployment. Yeah. So if we're not maximizing the use of our factors of production in an economy that might mean unemployment of labor, unemployment of capital. So you can consider point D is unemployment on a macro level there. What about allocative efficiency? Allocative efficiency is whether what's being produced is satisfying consumer demand, is satisfying consumer wants. A very very important concept given the basic economic problem. We cannot tell from a ppf diagram if allocative efficiency is being met because we don't know about consumer demand. So is point B here allocatively efficient? Is this combination of laptops and tablets being produced allocatively efficient? We don't know if this is not efficient if all that society wants, all that consumers want are laptops. That then is not allocatively efficient. Allocative efficiency would be there, wouldn't it? Whereas if society only wanted tablets to be produced, allocative efficiency would be there at my finger on the PPF. So we don't know about allocative efficiency from a PPF. We need to know consumer demand. So that's a very important thing to remember when drawing these curves. What is par efficiency? Parto efficiency is the idea that nobody can be made better off without making somebody else worse off. Any point on the PPF is par efficient. Let's take point B here. Because if we change point B, let's say you change point B to point C, we are producing more tablets, but we are giving up laptops. Therefore, we're making people who like tablets better off, but we're making people who like laptops worse off because less are produced. It's also partoff efficient because if we went the other way, let's say to point A. People who like laptops are better off because more is produced, but people who like tablets are worse off because less tablets are produced. Any point on the curve is parto efficient because any movement away somebody is made worse off by making somebody else better off. So these are the fundamental concepts of efficiencies that we can take from a ppf. Fantastic. How about looking at how to increase production on a ppf? Let's look at that next. There are numerous ways of showing how production can be increased on a ppf. I'm going to focus on my micro example here where we have a business that can make either laptops or tablets. The same concepts apply on a macro ppf as well. So let's say that this business in each case wants to increase tablet production. There are three ways we can show that on a PPF. Let's say this business is currently operating at point D at a productively inefficient point and a paro inefficient point here inside the curve at point D. They are not maximizing the use of their factors of production. There is some unemployment of them here. Well, one thing they could do if that's where they are producing is use their factors of production better. So use labor better. If there's any unemployment of labor in the business, use up labor. Same with idle capital. Use it up to increase production. Let's say from point D to point B and therefore we get more tablets being produced. So if they're producing at any point inside the curve, use factors of production better to increase production. That's one option. But let's say this business is already on the curve. They're already productively efficient and parto efficient. What could they do? Well, let's say they're at point B here. What could they do? Well, they could reallocate the use of their factors of production. they could re-employ factors of production to specialize more in tablet production. So maybe they were producing, I don't know, 50 units of tablets at point B. Well, to get to 70 units of tablets, what could they do? They could move factors of production away from producing laptops to an extent and towards producing tablets instead. So reallocating factors of production. Let's say they were producing a point A and only 25 tablets were being produced. Well, again, they could reallocate their factors of production towards producing more tablets, maybe moving from A to B and then from B to C. So, they could move along their PPF to favor tablet production by reallocating their factors of production. So, maybe moving workers away from producing laptops towards producing tablets, moving machines away from producing laptops towards producing tablets. Another option they have is not necessarily just to move along the curve and reallocate their factors of production, re-employ them, but instead to try and shift the ppf curve. Now, if they shift shifted the ppf curve, they can move from point x where maybe they were producing 50 units of tablets to point Y where now they can produce 70 units of tablets. But the beauty of shifting the curve is that they don't need to necessarily give up laptops to do so. You can see here that at point X again let's pick the same numbers maybe 50 laptops are being produced and at point Y even more laptops can also be produced as well as there being more tablets being produced. So how can this curve be shifted? What could a business do? Well very simply very generically they can increase the quantity andor the quality of their factors of production. the memory device here to help you just think Q square the cell the quantity and quality of our factors of production capital enterprise land and labor. So a business maybe could find a way to increase either the quantity of their factors of production or the quality of their factors of production. So what could this business do? Well, they could increase the quantity of labor, bring in more workers. That could increase uh production possibilities and shift the curve from PPF1 to PPF2. They could increase the quality of their labor, increase the productivity of labor. How? by training them up better. That will increase productivity and allow workers to produce more in a given time period. They could increase the quantity of capital, bring in more machinery or improve the quality of their capital, maintain their machinery, upgrade their machinery. They could increase the quantity of land if that's an option. Um maybe not so much for for this kind of a business, but if it's um an agricultural related business, increasing land can mean more crops can be produced. So increasing the quantity and the quality of factors of production allows the ppf curve to shift which is another way in which you can show increasing production. But the curve doesn't just have to shift in this way. It is possible to see a ppf curve shift like this where the curve shifts favoring only one of the goods instead of the other one. So in this case the shift is favoring the production of tablets not the production of laptops. And all that's happened here is that there has been a change in the quantity and or the quality of factors of production that purely suit the production of tablets. So maybe it's an increase in the quantity of labor, but those workers can only produce tablets. They are no good at producing laptops. Maybe it's an improvement in the quality of labor, so the productivity of labor, but only in the production of tablets. Maybe it's an increase in the quantity of capital, but only machinery that can produce tablets or the quality of capital that can only produce tablets. You get the idea. So an improvement in the quantity and or the quality of factors of production which is specialized in the production in this case of tablets then you can get a shift which is not even which is not parallel. It favors the production of one good over the other one. So that covers this entire topic area of PPF. You can see just how useful PPFs are on a micro level and a macro level in showing us so many different concepts in economics. Thank you so much for watching guys. Make sure you stay tuned for the next video.