Production Possibility Frontier

Production Possibility Frontier

Production possibility frontier:

The production possibility curve is a curve that represents the number of two different goods that can be produced given certain resource, (Hardwick, 2002) in this case the economic resource is labour hours, the maximum number of labour hours is 75,000 per week, the number of hours spent makings cowboy boots is 25 hours whereas making a cowboy hat is 15 hats

Therefore provided information is as follows:

75,000 hours per week making boots and hats

Cowboy boots = 25 hours

Cowboy hat = 15 hours

The maximum number of boots that can be produced in one week is calculated as follows:

Maximum Boots =75000/ 25 = 3000 boots

The maximum number of hats that can produce in one week is calculated as follows:

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Production Possibility Frontier

Maximum hats =75000/ 15 = 5000hats

Using excel we calculate the number of hats and boots that will be produced, the following table summarises the results:

boots

boot  hours

(number  of boots X 25)

number  of hats with remaining hours (remaining hours/15)

0

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Production Possibility Frontier

0

75000

75000

5000

500

12500

75000

62500

4166.667

1000

25000

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Production Possibility Frontier

75000

50000

3333.333

1500

37500

75000

37500

2500

2000

50000

75000

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Production Possibility Frontier

25000

1666.667

2500

62500

75000

12500

833.3333

3000

75000

75000

0

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Production Possibility Frontier

0

The following table summarises the number of boots and hats that can be produced:

number of boots

number of hats

0

5000

500

4166.666667

1000

3333.333333

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Production Possibility Frontier

1500

2500

2000

1666.666667

2500

833.3333333

3000

0

Using the above data the production possibility frontier will be as follows, the diagram was created using excel

Efficient and inefficient production:

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Production Possibility Frontier

The diagram below shows the possibility production frontier of hats and boots:

From the diagram above production point A depicts efficient production; point B shows inefficient production while point C cannot be achieved with the current resources.

Opportunity cost:

This section discusses the opportunity cost of producing one extra boot, given that the current production is at 1500 boots and 2500 hats, then producing one extra boot will yield the following results:

Boots = 1500 + 1 = 1501

Number of hours on boots = 1501 X 25 hours = 37525 hours

Remaining labour hours = 75000 – 37525 = 37475

Number of hats that can be produced = 37475/15 = 2498.333

Change in the number of hats = 2500 – 2498.333 = 1.666667

Therefore the opportunity cost of producing one boot is 1.6667 hats.

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Production Possibility Frontier

Increased resources:

If resources increase whereby labour hours increase to 95000 then the number of hats and boots that can be produced increases,

The following table summarises the results of an increase in labour hours from 75000 to 95000:

The maximum number of boots that can be produced in one week is calculated as follows:

Maximum Boots =90000/ 25 = 3600 boots

The maximum number of hats that can produce in one week is calculated as follows:

Maximum hats =90000/ 15 = 6000hats

The table below shows the combinations of the number of hats and boots that can be produced:

boots

boot hours

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Production Possibility Frontier

maximum hours

remaining hours after boots are  made

number of  hats with remaining hours

0

0

90000

90000

6000

500

12500

90000

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Production Possibility Frontier

77500

5166.66667

1000

25000

90000

65000

4333.33333

1500

37500

90000

52500

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Production Possibility Frontier

3500

2000

50000

90000

40000

2666.66667

2500

62500

90000

27500

1833.33333

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Production Possibility Frontier

3000

75000

90000

15000

1000

3600

90000

90000

0

0

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Production Possibility Frontier

The production possibility curve shifts upwards as follows:

From the chart the new frontier results from an increase in resources, therefore the point c which was previously not achievable can not be achieved with the increase in labour hours.

REFERENCE:

Phillip Hardwick (2002). Introduction to modern economics. New Jersey: Prentice hall

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