In this article, we're gonna discuss how the production possibilities frontier can be expanded. So let's say we had an economy that produces food and it produces natural gas and if this economy focused strictly on producing food, it would produce 100 million tons of food. If it's strictly pretty produced natural gas it would end up with 50 million tons of natural gas.
We know that all the points along this line are efficient in production. All the points along the PPF curve are efficient in production. This means if you picked any point right here on the curve, at that point you could not produce an additional unit of food without giving up some natural gas and vice-versa.
How to Expand the Production Possibilities Frontier (PPF)?
So we've talked about that, so this is basically the maximum amount of the different combinations of food and natural gas that we could produce in our economy, given our current level of resources. Now the question is how does this ever get bigger? Can we expand this PPF going forward so that there's a point where we could produce more than 100 million tons of food or more than 50 million tons of natural gas?
The answer is "Yes" there are a couple things that could happen that could allow us to shift this PPF outward. Then we could produce either more natural gas or food or more of each.
One way is that if we had some kind of technological breakthrough, we could produce one or more of these goods. Let's say that there's a new technology that comes out which is fracking.
We come out with fracking we've got this new technology and we say "Now we can reach we can access resources (The natural gas) that previously we couldn't access. Before it was the maximum amount of natural gas that we could achieve would be 50 million tons. If our economy was completely devoted to natural gas production we can get 50 million tons but maybe now it goes to 75 million tons. Because of this new technology now we've basically unlocked and been able to produce a lot more natural gas than we were before. If we focus strictly on producing natural gas now due to the new technology we can actually produce 75 million tons whereas before the maximum no matter what we did was 50 million tons.
Now another thing that we could do is we can have a situation where there's capital accumulation. If we accumulate capital then we're gonna be able to shift this PPF outward.
What is capital accumulation?
Capita Accumulation is basically trading off current consumption for investments. Let's say instead of Food in the "Y" axis we have Breads and then instead of Natural gas in the "X" axis we have Ovens. I know these numbers are gonna be a little weird but let's say that we have a situation where we have 100 million units of bread is the max we could produce or 50 million ovens.
If we were to say in Period One let's say that we're gonna focus a lot on ovens. Remember all these points along the PPF are efficient in production but we can choose any combination to be the actual production. So we choose a point over the PPF where we have a lot of ovens but not as much bread.
We choose that point because we'd have not that much bread but we'd have basically been at the close to the max the number of ovens. So if we choose in year one we invest a lot in ovens and in year two what is gonna happen is we've accumulated some capital. The ovens are capital right now. Because we have more ovens we can actually produce more bread now than we did before. Now our bread let's say that this curve now ends up something like this
and maybe now it's 110 million of bread or whatever. So we've expanded we can actually if we just focus strictly on bread in year two we can actually produce 110 million instead of a 100 which was before because we've accumulated some capital. Now, what's the trade-off there?
Well, we're trading off when we do this in year one we're saying okay we're gonna eat less bread. So we're trading off consumption and we're basically investing than in capital instead and then we're trading off for the capital. In this case, ovens are gonna allow us to actually be able to consume more in the future.
Now there's actually an additional way that isn't really expanding the PPF but it would actually allow you to consume at a point outside the PPF. All the points beyond the PPF are points here we'd say that they're not feasible given the current level of resources. We're not going to be able to reach any of these points now obviously if we expand the PPF then we can reach some of those points right and I just gave you two ways: capital accumulation and technology but there's a third thing that would not expand the PPF but it would actually allow us to consume at a point outside the PPF. That's called specialization in trade.
If we specialize in producing goods where we have a comparative advantage. If we have a comparative advantage in producing bread or whatever if we specialize in goods where we have a comparative advantage and then trade with other countries then we can actually get to a point one of these points that says is not feasible. We can actually consume potentially at one of those points by specializing in a good in which we have comparative advantage and trading with other countries and we'll talk about that more in the articles to come.
