Why production possibilities frontier is bowed outward

Correct answer: Unemployment at point consists of both frictional and structural forms of employment. Explanation : On the PPF, the unemployment rate is equal to the natural rate of unemployment which consists of frictional unemployment and structural employment but excludes cyclical unemployment.

Example Question 1 : Production Possibility Diagrams. Use the following graph to answer the questions below:. Possible Answers: An increase in the portion of the population joining the military.

An reduction in cyclical unemployment in the society. A change in land use from residential use to industrial use. A change in societal preferences towards consumer goods rather than capital goods. Correct answer: An increase in the size of the labour force. Example Question 9 : Production Possibility Diagrams. Use the diagram below to answer the following question:. Which of the following best explains the production possibilities diagram shown? Possible Answers: An increase in the size of the labor force.

A shift in preferences of the society away from capital goods and towards consumer goods. A technological improvement that makes it cheaper to produce consumer goods. Correct answer: A technological improvement that makes it cheaper to produce consumer goods.

Explanation : The diagram shows an increase in the potential productive capacity of the consumer good production without a corresponding increase in the productive capacity of capital good production. Copyright Notice. View AP Macroeconomics Tutors. Jeffrey Certified Tutor. Stephen Certified Tutor. Marjorie Certified Tutor. Report an issue with this question If you've found an issue with this question, please let us know. Do not fill in this field.

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Select personalised ads. Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. In business analysis, the production possibility frontier PPF is a curve that illustrates the possible quantities that can be produced of two products if both depend upon the same finite resource for their manufacture.

PPF also plays a crucial role in economics. It can be used to demonstrate the point that any nation's economy reaches its greatest level of efficiency when it produces only what it is best qualified to produce and trades with other nations for the rest of what it needs.

The PPF is also referred to as the production possibility curve or the transformation curve. If production is on the PPF, the country can only produce more of one good if it produces less of some other good. If the economy is producing less than the quantities indicated by the PPF, this is a sign that resources are not being used to their full potential. In this case, it is possible to increase the production of some goods without cutting production in other areas.

The production possibility frontier demonstrates that there are, or should be, limits on production. Each economy must decide what combination of goods and services should be produced in order to attain maximum resource efficiency. In business analysis, the PPF operates under the assumption that the production of one commodity can only increase if the production of the other commodity decreases, due to limited available resources.

Thus, PPF measures the efficiency with which two commodities can be produced simultaneously. This data is of importance to managers seeking to determine the precise mix of goods that most benefits a company's bottom line. The PPF assumes that technological infrastructure is constant, and underlines the notion that opportunity costs typically arise when an economic organization with limited resources must decide between two products. However, the PPF curve does not apply to companies that produce three or more products vying for the same resource.

The PPF is graphically depicted as an arc, with one commodity represented on the X-axis and the other represented on the Y-axis. Each point on the arc shows the most efficient number of the two commodities that can be produced with available resources. Economists use PPFs to demonstrate that an efficient nation produces what it is most capable of producing and trades with other nations for the rest.

For example, if a non-profit agency provides a mix of textbooks and computers, the PPF may show that it can produce either 40 textbooks and seven computers, or 70 textbooks and three computers.

The agency's leadership must determine which item is more urgently needed. In this example, the opportunity cost of producing an additional 30 textbooks equals four computers. For another example, consider the chart below. Imagine a national economy that can produce only two things: wine and cotton. For instance, producing five units of wine and five units of cotton point B is just as desirable as producing three units of wine and seven units of cotton.

Point X represents an inefficient use of resources, while point Y represents a goal that the economy simply cannot attain with its present levels of resources. As we can see, in order for this economy to produce more wine, it must give up some of the resources it is currently using to produce cotton point A. If the economy starts producing more cotton represented by points B and C , it would need to divert resources from making wine and, consequently, it will produce less wine than it is producing at point A.

Moreover, by moving production from point A to B, the economy must decrease wine production by a small amount in comparison to the increase in cotton output. But if the economy moves from point B to C, wine output will be significantly reduced while the increase in cotton will be quite small.

Keep in mind that A, B, and C all represent the most efficient allocation of resources for the economy. The nation must decide how to achieve the PPF and which combination to use. If more wine is in demand, the cost of increasing its output is proportional to the cost of decreasing cotton production. Markets play an important role in telling the economy what the PPF ought to look like.

Consider point X on the figure above. Being at point X means that the country's resources are not being used efficiently or, more specifically, that the country is not producing enough cotton or wine, given the potential of its resources. On the other hand, point Y, as we mentioned above, represents an output level that is currently unattainable by this economy. If there were an improvement in technology while the level of land, labor, and capital remained the same, the time required to pick cotton and grapes would be reduced.

The output would increase, and the PPF would be pushed outwards. A new curve, represented in the figure below on which Y would fall, would show the new efficient allocation of resources. When the PPF shifts outwards, it implies growth in an economy.