Production Possibilities

Economic Growth

Economic growth can be illustrated using the production possibility frontier.

The economy's production possibility frontier can illustrate economic growth: the ability of an economy to produce more goods and services over time. This might be because there are more resources available to the economy as time passes or because a new technology is developed, allowing the economy to use existing resources more efficiently.

Because an economy's available resources include the number of workers, increasing the number of working people in the economy causes economic growth. So does finding new sources of raw materials or a technological innovation (such as the assembly line or computerization), making the economy more efficient.

Shifts in the Production Possibility Frontier

Shifts in the production possibility frontier can be to the right if the economy grows or to the left if the economy worsens.

Economic growth shifts the economy's production possibility frontier to the right from its initial location. Given the increased amount of available resources, or new and better technology, the economy can produce more of both goods. This shifts the PPF to the right of its original position. Additionally, a biased technological change can increase the production of just one good, which can cause a pivot of the PPF. This occurred historically in some areas of the North of the United States when milling became manufactured and mill towns focused on producing cloth rather than grain.

For example, if Jerry develops an improved method of catching fish, his PPF pivots to reflect this change. The maximum number of bananas Jerry can gather has not changed, but his opportunity cost changes, because now each additional fish he catches means giving up fewer bananas (he is more efficient at catching fish).

The opposite is also true. If the number of workers or the amount of available raw material decreases, the production possibility frontier shifts to the left, indicating a worsening in the economy for both goods. This may be caused by a major natural disaster or as an effect of war.

On an isolated island, Jerry is a one-person economy. Through experience, Jerry becomes more efficient at gathering fish and bananas and now produces more fish and bananas per hour. This results in economic growth. The effect of his increased efficiency can be shown by shifting his production possibility curve to the right. Jerry now has new maximum amounts of each good (the end points of his new frontier).

It is also important to note that what used to be efficient at Jerry's original skill level (any point on his original frontier) is now inefficient because it is now inside his new frontier.

With Jerry's new skill set, it is logical that for any given quantity of bananas gathered, Jerry will choose to catch more fish. He wants to produce on his new frontier because he now has the ability to do so.

Shifts in Jerry's Production Possibility Frontier

Through experience, Jerry's efficiency increases. This shifts his production possibilities frontier (PPF). Jerry has increased the amount of food he can produce even if other variables, such as the number of hours in a day, remain the same.
In both frontiers, the maximum number of fish Jerry can catch (with zero bananas) is greater than the maximum number of bananas he can gather (with zero fish). While Jerry can produce both goods, he is better at catching fish. Jerry could have a comparative advantage in catching fish, that is, the benefit gained by producing a good with lower opportunity cost than others have to produce the same good. If Jerry's production possibility frontier is compared to someone else's, this can illustrate the benefits of comparative advantage and trade, although in the current example, Jerry has no one to trade with. In a different scenario, Jerry might instead increase his ability only to catch fish. His ability to harvest bananas does not change. This could be due to him making improved technology, such as weaving a fishing net. This causes his PPF to pivot, because the maximum number of bananas he can gather has not changed, but the maximum number of fish he can catch has changed. His opportunity cost for each good changes as well, because the entire frontier has shifted.

Shift of Only One Good in Jerry's Production Possibility Frontier

When technology affects the production of only one good, the production possibility frontier (PPF) pivots, which changes the opportunity cost for both goods. Here, Jerry has gotten better at catching fish, but his ability to gather bananas has not changed.