production possibilities frontier (ppf)

Upload: farisha-faris

Post on 16-Oct-2015

84 views

Category:

Documents


0 download

TRANSCRIPT

Production possibilities frontier (PPF).

INTERNATIONAL ECONOMICECO 561

PREPARED FOR :MADAM SALIZA BINTI SULAIMAN

PREPARED BY :Noor Aizatul Adzwa Hanim bt AnuarWan Nur Amirah bt Wan OsmanShafiyah bt Mohd YusofAmanina bt JamaludinAshrifa bt AhmadNur Azeela bt DanielRosanita bt suhaimiProduction possibilities frontier (PPF).under constant costCurve that show the alternative combination of 2commodities that a nation can produce by fully utilizing all of its resources given the available technology.

Definition MalaysiaIndonesiaScarfClothscarfcloth18015012090603000204060801001206050403020100020406080100120Table 1 : Production Possibilities Schedules for Scarf and Cloth in Malaysia and IndonesiaTable 1

For the Malaysia, each 30S given up, just enough resources are released to produce additional 20C (i.e 30S = 20C), so the opportunity cost of 1S=2/3C.

For the Indonesia, opportunity cost of 1S=2C.

The data can be used to construct a PPF as shown in Figure 1Chapter 25FIGURE 1 The Production Possibility Frontiers of the Malaysia and the Indonesia.Chapter 26

MalaysiaIndonesiaScarfScarfClothClothFigure 1

Any points inside (below) PPF possible but inefficient. Show idle resources exist.

Any point above PPF cannot be achieved with the given technology and resources.

Negative slope of the PPC shows that if the nations want to produce more Scarf, they must give up some cloth production ( vice-versa)

In this case PPF for both nations are straight line which shows constant opportunity costs.

Chapter 27Constant opportunity costs arise when:

1) Resources are either perfect substitutes for each other or used in fixed proportion in the production of the commodities and;

2) All units of the same factor are homogeneous or exactly the same quality.

Constant costs are therefore not realistic.Chapter 28Opportunity Costs & Relative Commodity Prices

Figure 1

-Slope of PPF (transformation curve) is referred to marginal rate of transformation.

-Slope of PPF for Msia (or the opp. cost of scarf) is Ps/Pc =120/180 = 2/3

- Slope of PPF for Indo is Ps/Pc =120/60=2

- The lower Ps/Pc in the Malaysia shows that the Malaysia has comparative advantage in scarf (lower Pc/Ps in Indonesia shows its comparative advantage in cloth).

Chapter 29- Relative commodity prices is the price of one commodity divided by the price of another commodity. (i.e slope of PPF)

Conclusion T The difference in relative commodity prices between 2 nations (i.e the slope of their PPF) is a reflection of their comp. advantage & provides the basis of their mutually beneficial trade.

Chapter 2102.7 Gains from Trade (Constant Cost)

Figure 2

-Without trade, lets say production & consumption: Malaysia ------ 90S & 60C (pt A) Indonesia---- 40S & 40C (pt A)

- With specialization: Malaysia ------ 180S & 0C (pt B) Indonesia---- 0S & 120C (pt B)

Chapter 211With exchanging 70S for & 70C:

Malaysia ------ 110S & 70C (pt E) Indonesia----- 70S & 50C (pt E)

Gains from specialization & trade:

To Malaysia ---- 20S & 10C To Indonesia ---- 30S & 10C

Chapter 212 FIGURE 2 The Gains from TradeChapter 213

scarfscarfIndoMsiaclothcloth