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Lesson and Worksheet

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Notes

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Further Reading and Revision

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What is the 'Production Possibility Frontier - PPF'

The production possibility frontier (PPF) is a curve depicting all maximum output possibilities for two goods, given a set of inputs consisting of resources and other factors. The PPF assumes that all inputs are used efficiently.

Factors such as labor, capital and technology, among others, will affect the resources available, which will dictate where the production possibility frontier lies. The PPF is also known as the production possibility curve or the transformation curve.

BREAKING DOWN 'Production Possibility Frontier - PPF'

The PPF indicates the production possibilities of two commodities when resources are fixed. This means that the production of one commodity can only increase when the production of the other commodity is reduced, due to the availability of resources. Therefore, the PPF measures the efficiency in which two commodities can be produced together, helping managers and leaders decide what mix of commodities are most beneficial. The PPF assumes that technology is constant, resources are used efficiently, and that there is normally only a choice between two commodities.

Understanding and Interpreting the PPF

The PPF drives home the idea that opportunity costs normally come up when an economic organization with limited resources must decide between two alternatives. The PPF is depicted graphically as an arc, with one commodity on the X axis and the other commodity on the Y axis. At each point on the arc, there is an efficient number of the two commodities that can be produced with available resources. Therefore, it's up to the organization to look at the PPF and decide what number of each commodity should be produced to maximize the overall benefit to the economy.

If, for example, a government organization is deciding between the production mix of textbooks and computers, and it can produce either 40 textbooks and 7 computers or 70 text books and 3 computers, it's up to that organization to determine what it needs more. In this example, the opportunity cost of producing an additional 30 textbooks is 4 computers.

Understanding the Pareto Efficiency

The Pareto Efficiency is a concept named after Italian economist Vilfredo Pareto that measures the efficiency of the commodity allocation on the PPF. The Pareto Efficiency states that any point within the PPF curve is considered inefficient because the total output of commodities is below the output capacity. Conversely, any point outside the PPF curve is considered to be impossible because it represents a mix of commodities that will take more resources to produce than can be obtained.

Therefore, any mix of two commodities, given limited resources, is only efficient when it lies on the PPF curve, with one commodity on the X axis and one commodity on the Y axis. Achieving the Pareto Efficiency means that an economy is operating at maximum potential and lies directly on the PPF.

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The production possibility frontier (PPF) is a curve depicting all maximum output possibilities for two goods, given a set of inputs consisting of resources and other factors. The PPF assumes that all inputs are used efficiently. Factors such as labor, capital and technology, among others, will affect the resources available, which will dictate where the production possibility frontier lies.

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Further Reading

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What made traditional economies so radically different and so very fundamentally dangerous to Western economies were the traditional principles of prosperity of Creation versus scarcity of resources, of sharing and distribution versus accumulation and greed, of kinship usage rights versus individual exclusive ownership rights, and of sustainability versus growth.
Of the various types of economies in the world today, market economy, which is predominantly a capitalist economy, and mixed economy, which has a blend of capitalism and socialism, are perhaps the most popular. At the other end of the spectrum, lies the traditional economy―a type of economy which has been virtually phased out as a result of economic growth and development.

Traditional Economy Explained

In economics, an underdeveloped economy wherein people still use primitive tools and resort to age-old methods of harvesting is referred to as traditional economy. One of the salient features of this type of economy is very little or at times, total absence of economic growth. As it is largely dependent on agriculture and allied sectors, it is also called subsistence economy.

While its generally accepted definition revolves around its dependence on agriculture, socialist economists believe that its definition can only be considered complete when you add to it the fact that these economies have a well-rooted social setup, such that social customs and beliefs have a crucial role to play in economic decisions. Yet another factor that determines whether a region has traditional economy is the prevalence of barter system.

In a broad sense, the term is most often used by member states of developed economies for economies which are underdeveloped. The concept, which was quite popular in older times when most of the countries were dependent on agriculture, fizzled out as countries inched towards development. As a country with traditional economy develops, it morphs into one of the various economy types.

As social customs and beliefs play an important role in this economic system, the whole community bonds together and works as a single, close-knit unit. On the flip side, however, it has a weak financial base and the community is more focused on self sustenance rather than improving their standard of life.

Examples of Traditional Economy

No country in the world follows a purely traditional economic system as of today. However, there do exist some regions which continue to practice agriculture and allied activities for a living. Many people are prompt to tag countries from South Asia and Africa as traditional economies, but that is technically incorrect.

Most of the countries in the world today fall in the category of developing countries. Even the ones which are underdeveloped do not technically qualify to be called traditional economies, as they are not entirely dependent on traditional agriculture. Even in countries wherein agriculture sector has a crucial role to play, primitive techniques have been replaced by modern techniques which results in more production and add to the overall economic growth.

As for countries wherein a significant portion of the population continues to practice primitive techniques of agriculture, the list includes names like Bangladesh, Burma, Malawi, etc. You need to keep in mind that these countries are not purely traditional economies. In true sense of the term, a purely traditional economy is that of the Inuit, native Indians, pygmies, and other indigenous tribes for whom economics is all about self-sustenance.

There are several different types of economies, each having its own pros and cons. In the case of traditional economy though, there seem to be more cons than pros, which is exactly why most of the countries have already transformed into market or mixed economy. Interestingly, most of these countries have a mixed economy, wherein agriculture―in its modern avatar―has a crucial role to play.

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The Concept of Traditional Economy Explained With Examples

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As the term 'traditional economy' is very vague and unspecific, you are less likely to see its application in the field of economics today. So, do we have traditional economies thriving in any part of the world? In order to figure out the same you will have to get well-versed with the basics of this economic concept.

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Plus Questions

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Economics Revision

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Shifting the Production Possibilities Curve - Macro Topic 1.2 (Micro Topic 1.3)

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Economics Revision