what do you mean by the production possibilities of an economy?
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Explanation:
ECONOMY ECONOMICS
Production Possibility Frontier (PPF)
REVIEWED BY ANDREW BLOOMENTHAL Updated Jun 8, 2019
What Is the Production Possibility Frontier (PPF)?
In business analysis, the production possibility frontier (PPF) is a curve illustrating the different possible amounts that two separate goods may be produced when there is a fixed availability of a certain resource that both items require for their manufacture. The PPF, which assumes that production is optimally efficient, is alternatively referred to as the "production possibility curve" or the "transformation curve."
In macroeconomics, the PPF represents the point at which a country’s economy is most efficiently producing its goods and services and, therefore, allocating its resources in the best way possible. There are just enough apple orchards producing apples, just enough car factories making cars, and just enough accountants offering tax services. If the economy is not producing the quantities indicated by the PPF, resources are being managed inefficiently and the stability of the economy will dwindle. The production possibility frontier shows us that there are limits to production, so an economy, to achieve efficiency, must decide what combination of goods and services can and should be produced.
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Production Possibility Frontier (PPF)
Understanding the Production Possibility Frontier
The PPF operates under the assumption that the production of one commodity may only increase if the production of the other commodity decreases due to limited available resources. The PPF consequently measures the efficiency in which two commodities can be produced together. This data is of paramount importance to managers seeking to determine the precise proportional mix of goods that most greatly 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.
Interpreting the PPF
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.
While PPFs are customarily drawn as bulging upwards or outwards from the origin, they can also be shown as a bulging downward (inwards) or linear (straight).
For example, if a government organization that produces a mix of textbooks and computers can produce either 40 textbooks and seven computers, as compared with 70 textbooks and three computers, it is incumbent on company leadership to analyze which item is required at the higher urgency. In this example, the opportunity cost of producing an additional 30 textbooks equals four computers.
Let's turn to another example and consider the chart below. Imagine a national economy that can produce only two things: wine and cotton. According to the PPF, points A, B and C – all appearing on the PPF curve – represent the most efficient use of resources by the economy. For instance, producing 5 units of wine and 5 units of cotton (point B) is just as desirable as producing 3 units of wine and 7 units of cotton. Point X represents an inefficient use of resources, while point Y represents the goals that the economy simply cannot attain with its present levels of resources.
Answer:
Production possibilities of an economy are the different alternatives or options an economy has, as to what and how much of it to produce, when all its resources are employed (used). This usually involves graphing the different options as combinations on a PPC or PPF curve.
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