Production Factors and the PPF Factors of Production

Production Factors and the PPF

Factors of Production Factors of production are resource inputs used to produce goods and services. These are: ◦ Land ◦ Labor ◦ Capital

Land refers to all natural resources such as crude oil, water, air, climate, sea coasts and minerals. ◦ It is not just the ground or exploitable minerals below it. ◦ Land is nature’s bounty. The US is very rich in land. The country of Chad is very poor, despite having some oil reserves.

Labor Labor refers to the human contribution to the production process. It includes both quantity and quality. The quantity of labor is the size of the labor force. The quality of depends upon its skills and abilities to produce goods and services. Building more skills and abilities requires investing in people, building human capital.

Physical Capital Physical Capital includes those goods which we produce for use in the production of other goods, i. e. , our tools. It also includes factories, roads and transportation networks, communication networks, whatever we produce that aids in the production of other goods. Human and Physical Capital require using resources in order to obtain them. In essence, investment.

Technology Technology is not exactly a factor of production. It refers to the processes in which resources are turned into goods and services. The better the technology, the more goods that can be produced from a given amount of resources. The potential level of production is just as reliant on technology as the level of resources.

Limits to Output No matter how an economy is organized there is a limit to how much can be produced. The most evident limit is the amount of resources available for producing goods and services. Another is the level of technology.

Limits to Output Scarcity is the cause of the choices we have to make in production. A resource has to be used in a certain production. Allocation of resources is an important part of creating efficient production.

Production Possibilities Curves/Frontiers Production possibilities frontiers (PPFs) are the alternative combination of goods and services that could be produced in an economy in a given period of time. It depend on the quantity and quality of available resources, the level of technology and that resources are used wisely. PPFs are useful tools in demonstrating important economic concepts.

Graphing the Production Possibilities Frontier The Production Possibilities Graph is a representation of all possible mixes of production between two groups of goods. Each point on the production possibilities curve depicts an alternative mix of output, all of them efficient. The curve shows the efficient combinations.

The Production Possibilities Curve

Production Possibilities Scarce resources – there’s a limit to the amount we can produce in a given time period with available resources and technology. This is demonstrated by the inability to produce at a point outside the curve

Production Possibilities Opportunity costs – we can obtain additional quantities of any desired good only by reducing the potential production of another good. As we move along the curve, the amount we need to give up increases. This is called the Law of diminishing returns

Increasing Opportunity Costs

Efficiency means getting the maximum output of a good from the resources used in production. Every point on a production possibilities curves is efficient.

Inefficiency A production possibilities curves shows potential output, not necessarily actual output. Production at inefficient quantities will be less than at efficient quantities. Inefficiency is represented by points inside the production possibilities curve.

OUTPUT OF SHOES Inefficient production 5 A 4 B 3 Y 2 C Inefficient 1 0 1 2 3 4 OUTPUT OF TELEVISIONS 5

Economic Growth All output combinations that lie outside the production possibilities curve are unattainable with current resources and technology. To produce outside the PPF, there must be economic growth.

OUTPUT OF SHOES Economic Growth 5 A X Currently not attainable B 4 C 3 2 1 0 1 2 3 4 OUTPUT OF TELEVISIONS 5

Economic Growth Economic growth is an increase in output (real GDP) — an expansion of production possibilities. This results from an increase in resources or the level of technology

OUTPUT OF SHOES Economic Growth 0 PP 2 PP 1 OUTPUT OF TELEVISIONS