Shifts in the Production Possibilities Curve

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Lesson Transcript
Instructor: Jon Nash

Jon has taught Economics and Finance and has an MBA in Finance

In this lesson you will learn how changes inside an economy lead to changes in the production possibilities of a nation. See how different scenarios from everyday life lead to shifts in the production possibilities curve.

Production Possibilities Frontier

The production possibilities frontier (PPF) is an economic model used to illustrate how people and nations should decide what goods to produce, how much to produce, and for whom they should produce it. It's a model and a concept that looks at only two goods at a time. For example, what combination of cars and computers should a nation produce?

The Production Possibilities Curve

The production possibilities curve illustrates all the possible combinations of how we can produce these two goods given the constraints we have, including the fact that resources are scarce. The question we're answering in this lesson is, 'What causes the production possibilities curve to shift?'

Before we answer this, let's review some of the basic ideas about the production possibilities curve, using two types of curves. Let's say we have a production possibilities curve showing the production of two goods: cars and computers.

Consumer and Capital Goods

Economists also use the PPF model to illustrate two categories of goods, both consumer goods and capital goods. So here is what that PPF curve looks like.

Every point along the curve is efficient; points outside the curve are unobtainable or inefficient
Graphs of production possibilities curve

In any economy, investments into capital goods will do more to increase economic growth than investments into consumer goods will. For both of these types of curves, every point along the curve is efficient, meaning this combination of producing two goods is at our capacity. We're producing the most that we can with the least amount of costs. Movement along this curve reveals the tradeoffs that are required to produce more or less of a good. We said that any point inside the curve is not efficient, and any point outside the curve is unobtainable.

The best example in history of when America's economy was inside the curve was during the Great Depression. At that time, unemployment was extremely high, and production was extremely low. But eventually, during World War II, our economy moved from inside the curve to somewhere on the curve. Now we're producing things as fast as we can, largely driven by the war, but we are on the curve. Even though we were producing a lot more, we still had a limit, a capacity that we couldn't exceed, unless something major changed. That's why any point that is outside the curve is not possible.

The production possibilities curve, whether it is showing two specific goods, such as cars and computers, or two types of goods, such as capital goods and consumer goods, shows us how much is produced, which means it's showing us a picture of output.

Shifts in the PPF Curve

So, now we can talk about shifts in the entire curve. The basic idea is that anything that causes economic output to increase or decrease will shift this curve. In any economy, the major goal that you're trying to achieve is growth, which is to say, producing increasing amounts of the goods and services that consumers demand.

An outward shift in the curve reflects growth, while an inward shift means decreasing output
Outward or inward curves

Given the fact that resources are scarce, we have constraints, which is what the curve shows us. When the economy grows and all other things remain constant, we can produce more, so this will cause a shift in the production possibilities curve outward, or to the right. If the economy were to shrink, then, of course, the curve would shift to the left. When the curve shifts outward, or to the right, that means output is increasing. When the curve shifts inward, or to the left, that means output is decreasing.

Shifts in the production possibilities curve are caused by changes in these things:

• Advances in technology

• Changes in resources

• More education or training (that's what we call human capital)

• Changes in the labor force

Shifts in Technology

Let's briefly explore each one of these and see how they shift the curve. Probably what you hear about most in economics is how changes in technology affect the curve.

For example, let's say the country discovers a new technology, such as a new computer system that improves productivity. Anything that improves the productivity of workers is good. This causes output to increase, so the production possibilities curve shifts outward, or to the right. On the other hand, let's say a major war causes destruction of capital equipment in the country. This would cause output to decrease, so in this case, the production possibilities curve shifts inward, or to the left.

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