Concavity of PPF (1 Viewer)

-pari-

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- could someone flesh out why the production possibility frontier is concave?

from memory i think riley/leading edge had a good explanation - but i no longer have the books.

cheers.
 

williamc

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-pari- said:
- could someone flesh out why the production possibility frontier is concave?

from memory i think riley/leading edge had a good explanation - but i no longer have the books.

cheers.
This is how i see it.

The straight PPF diagram is just giving a theoretical visual representation of the theory of opportunity cost.

In reality, or real world economies, the line will never be straight, as the opportunity cost doesn't work in equal segments of trade off. The concave shows at certain levels of production the opportunity cost is always changing and never equal.

I could be way off and be thinking about something else but, oops.

pari: have you already started ppf in uni?? lol we are doing supply and demand diagrams, economic problem etc.
 
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williamc

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"An example of a conventional PPF is shown in the diagram above which shows potential output of DVD players and MP3 players from a given stock of labour and capital. Combinations of the two goods that lie within the PPF are feasible but show an output that under-utilises existing resources or where resources are being used inefficiently"

I was right. Revolves around the theory of opportunity cost.
 

gnrlies

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williamc said:
"An example of a conventional PPF is shown in the diagram above which shows potential output of DVD players and MP3 players from a given stock of labour and capital. Combinations of the two goods that lie within the PPF are feasible but show an output that under-utilises existing resources or where resources are being used inefficiently"

I was right. Revolves around the theory of opportunity cost.
In a round about way you could say it related to opportunity cost but I dont think thats the cleanest way to answer this question.

It is to do with what is known as decreasing returns to scale. For example if I have a factory and have 100 workers making rubber tyres, this may produce 100 tyres. But what might happen if I double my workers? If I suddenly have 200 workers, a straight line PPF assumes constant returns to scale. That is, 200 workers will produce 200 tyres. But in reality this is not the case. Chances are it will be less (lets say 200 workers only produce 150 tyres). Subsequently the PPF is curved.

This reflects descreasing returns to scale, because if you apply all of your available capital and labour to produce a single good (rather than a range of goods) you will begin experiencing descreasing returns to scale.

On the other hand, lets assume we are devoting all of our resources to one good in our two good economy. Lets say we then move along the PPF and start producing some of the second good. We will intially start experiencing increasing returns to scale. In this case lets say our factory has 50 workers, and we double it to 100 workers. Our output may actually increase from 25 to 100 (reflecting increasing returns to scale). There will be a point however where this discontinues (lets say at 100 workers) where we will start having decreasing returns to scale. At this point where it changes, you would say we have constant returns to scale. This would be at the point where the PPF bulges out the most.

Of course this is made slightly more complicated with a two good example (and certainly even more complicated in a real economy) but it goes some way to explaining why it is not a straight line.

This is the same theory that explains economies of scale.
 

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