Economics Assignment

            The Production Possibility Frontier is used to evaluate the effectiveness of production processes and resources efficiency in economy. In other words, “the Production Possibility Frontier (PPF) shows the maximum output that can be produced in an economy at any given moment, given the resources available” (McConnell & Brue, 2005). Generally, when particular economies utilize their scarce resources to the fullest, they always produce on PPF. With production below the PPF line, the state does not fully utilize its resources; simultaneously, with limited resources the state is unlikely to achieve production levels above the PPF curve.

            Under certain economic conditions, and assuming that the output is divided between consumer and capital goods, the PPF curve may either move upward and downward. Usually, PPF shifts indicate the changes in availability and amount of resources required to produce consumer and capital goods on PPF curve. These shifts are usually caused by the changing amounts of available resources in economy. The PPF curve shifts outward, when the amount of resources in economy increases; as a result, the economy is able to produce more of both products.

The PPF curve will shift outward, if:

-         employees acquire better access to training and education, subsequently becoming more productive;

-         the state is concentrated on investing into various types of capital goods (e.g. equipment); in the short-term period, such investments will cause consumer goods production decrease, but in the long run capital investments will improve the quality and productivity of firms, and will enable them to produce more consumer products;

-         PPF curve shifts outward under the impact of the growing population (e.g., due to immigration);

-         technological development may lead to PPF shifting outward.

Unfortunately, economy does not always display promising trends and may be negatively impacted by numerous factors, including cyclical recession and the outflow of labor force. Sometimes, the PPF curve may shift inward under the impact of various economic pressures, including ecological catastrophes and military conflicts. Any change that results in the reduction of available resources inevitably shifts the PPF curve inward. For example, if Iran and UAE lose their access to oil resources, their PPF curves will shift inward.

The current financial crisis threatens the long-term economic stability in the UK; as a result, the PPF curve is likely to display negative inward shifts. The crisis seems to deprive firms and businesses of an opportunity to invest into capital goods and to commercialize innovative technological ideas. Businesses find themselves unable to maintain constant production levels due to the fact that consumers lack financial resources, and are no longer able to purchase a great variety of consumer goods. Many of these consumers are being laid off, further decreasing the level of productivity in the economy and shifting the PPF curve inward. Capital goods tend to depreciate with time, and as businesses are not able to replace them and to invest into technological innovations, such depreciation also moves the PPF curve inward. In these conditions, the economy will seek the new appropriate balance between consumer and capital goods. By moving the PPF curve inward, economy in general, and UK businesses in particular, will adapt to the new economic requirements, trying to preserve the stability of their business performance under the pressure of threatening financial shakes.

 

References

McConnell, C.R. & Brue, S.L. (2005). Economics: principles, problems, and policies.

McGraw-Hill Professional.