Title: TOPIC 2
URL Source: file://pdf.d516443ffb55a6bc500ebc219e1a593b/
Markdown Content:
> TOPIC 2
## ECONOMIC PROBLEMS
## & PRODUCTION POSSIBILITY
## FRONTIER CONTENTS
relationship between the production possibilities
frontier (PPF) and economic problems - scarcity,
choice, and opportunity cost .
the shapes of the production possibilities frontier
factors that shift the PPF curve .
Application of PPF curve :
> single country/firm
> International trade INTRODUCTON
All decision in economy constrained by the
scarcity of available resources
Because resources scarce, all economy
decision involve trade -off -- if u need one
thing you have give up another thing .
Scarcity of resources means resources are
always limited necessity of choices (recall
topic 1)INTRODUCTON
## Because physical resources are limited we
## have to make some hard choices .
## More of one output less of the other
## output .
## Eg : If we use many resources in the
## production of car then we have cut back
## another production let say refrigerator .PRODUCTION POSSIBILITY
> FRONTIER (PPF)
PPF is used to explain three fundamentals problem
in economics scarcity, choice and opportunity
cost .
For instance, each country needs to allocate its
limited resources to produce goods across various
industries such as education, healthcare, food,
infrastructue etc .
Hence, countries must make choices about which
goods to produce and which goods to forgo .DEFINITION OF PPF
Production possibilities frontier a curve that
depicts maximum combinations of two goods
that can be produced by the country using all
available resources at a specific technological
level
PPF = a graph showing different combinations of
output for a given amount of inputs
> More of one good less of another
> Illustrates opportunity costs in production
## PPF : ASSUMPTION
Assumptions for the formation of the production
possibilities frontier :
The country only produces 2 types of goods
The production factors are fixed and the country use all the
available resources
The technological level are fixed
Full utilization of resources PRODUCTION POSSIBILITY
FRONTIER : TABLE
Combination Health
(Y)
Education
(X)
A 21 0
B 20 1
C 18 2
D 15 3
E 11 4
F 6 5
G 0 6
> Table 2.1 : Production of Health and Education
PRODUCTION POSSIBILITY
FRONTIER : GRAPH
> A
> B
> C
> D
> E
> F
> G
> 0
> 2
> 4
> 6
> 8
> 10
> 12
> 14
> 16
> 18
> 20
> 22
> 24
> 01234567
> Health
Education
The production possibilities frontier slopes downward
to the right PPF & ECONOMICS PROBLEMS
SCARCITY
Along the PPF curve when increase the production of education need
to decrease the production of health .
CHOICE
Movement from point to point along the PPF curve trade -off
occur
Move from A to B
At A if the country used all the resources to produce health then
the production of health is zero
At point B - if the country want to produce both - need to decrease
the production of health to increase the production of education
OPPORTUNITY COST
Negatively sloped ; the slope = opportunity cost
From A to B - to increase 1 unit of education need to decreased 1
unit health PPF : CALCULATION OF
OPPORTUNITY COST
Point Movement Raduction in
Health ( )
Increase in
education ( )
Opportunity
Cost X
( )
20 21 = 1 1 0 = 1 1/1 = 1
18 20 = 2 2 1 = 1 2/1 = 2
15 18 = 3 3 2 = 1 3/1 = 3
11 15 = 4 4 3 = 1 4/1 = 4
6 11 = 5 5 4 = 1 5/1 = 5
0 6 = 6 6 5 = 1 6/1 = 6
Increasing opportunity cost due to an imperfect substitute
input.
Implication: The shape of PPF curve is convex from the origin THE SLOPE OF PPF
The slope of PPF = Marginal rate of transformation (MRT)
Formula:
=
MRT XY measures the opportunity cost of producing the
good at X axis (horizontal axis) which is education
(refer to the example) .THE SHAPE OF PPF
The shape of PPF determined by the type of opportunity
cost.
Constant opportunity cost - PPF with straight line
due to perfect substitute input
Decreasing opportunity cost PPF concave to the origin
Specialization in production process reduce average cost
benefit from economies of scale. THE SHAPE OF PPF
Constant Opportunity Cost Decreasing Opportunity Cost PRODUCTION POSSIBILITY
FRONTIER : EFFICIENCY
> A
> B
> C
> D
> E
> F
> G
> 0
> 2
> 4
> 6
> 8
> 10
> 12
> 14
> 16
> 18
> 20
> 22
> 24
> 01234567
> Health
Education
I
H
Unattainable Region
Attainable Region SHIFT IN PPF
Economic growth caused a rightward shift in the
production possibilities curve,
Economic growth will occur if:
> Increases in the amount of production factors
> (resources)
> Increase in labor supply due to the influx of foreign
> workers
Technological advancements contribute to
economic growth through innovation, digital
economic development, and increased labor
productivity. SHIFT IN PPF
Assumption:
Education is labor intensive
Health is capital intensive SHIFT IN PPF
Assumption:
Technological Advancement PPF: APPLICATION
PPF can be used to explain the benefits of
specialization when a country is involved in
international trade.
Absolute advantage the ability to produce a good
more efficiently than others.
Comparative advantage the ability to produce a
good at a lower opportunity cost/relative price
compared to others. ABSOLUTE ADVANTAGE
Absolute advantage is a concept that measures a
country's production capacity by comparing labor
productivity between countries.
Assumption:
2 countries, A & B producing cloth and food.
Input used is labor with different productivity (see table)
Labour cost = RM10/hour
Each country has 1000 hours of labor
> Clothes (X) Food (Y)
> Country A 22
> Country B 41
> Table shows the use of labor (hour) to produce 1 unit of output
ABSOLUTE ADVANTAGE
> Production Cost
> Clothes (X) Food (Y)
> Country A 2 x 10 = RM20 2 x 10 = RM20
> Country B 4 x 10 = RM40 1 x 10 = RM10
Country A has absolute
advantage in producing
clothes because has
lower wage costs
compared to labor in
country B.
Country B has
absolute advantage
in producing Food
because has lower
wage costs
compared to labor in
country A.ABSOLUTE ADVANTAGE
0
100
200
300
400
500
600
700
800
900
1000
1100
0 50 100 150 200 250 300 350 400 450 500 550
> Food
Clothing COMPARATIVE ADVANTAGE
The concept of comparative advantage evaluates a country's
production capacity using the concept of opportunity cost
(relative cost)
> Clothes (X) Food (Y)
> Country A 22
> Country B 21
Table shows the use of labor (hour) to produce 1 unit of
output COMPARATIVE ADVANTAGE
Assuming each country has the same total labor/time (1,000
hours), hence :
Country B has an absolute advantage in food production
because it can produce more food (Y) .
Country A and Country B can produce the same amount of
clothing (X), and it cannot be determined which country has an
absolute advantage in clothing production use comparative
advantage to find it .COMPARATIVE ADVANTAGE
PPF curve for Country A and B COMPARATIVE ADVANTAGE SPECIALIZATION AND BENEFITS OF
INTERNATIONAL TRADE Both countries benefit from international trade - consumption
points lie outside the boundaries of their PPF .
It is unreachable without engaging in international trade. SPECIALIZATION AND BENEFITS OF
> INTERNATIONAL TRADE
SPECIALIZATION AND BENEFITS OF