What causes shifts in the production possibilities frontier (PPF or PPC)? - FreeEconHelp.com, Learning Economics... Solved!


What causes shifts in the production possibilities frontier (PPF or PPC)?

Updated August of 2018 to include more information and examples.

Previous posts have gone over the description and construction of the production possibilities frontier, but have always assumed that the PPF stayed where it was or that everything else was held constant.  Keep in mind that some texts will call it the production possibilities curve (PPC) while this post calls it the production possibilities frontier. Both names describe the same concept.

In the real world there are several events that can occur that would cause the PPF to shift, or cause changes in its shape.

The most common reason a PPF would shift is because of a change in technology, or because of economic growth.  For example, if someone developed a faster computer, or a more efficient way of manufacturing cars, we might see a shift to the right in the PPF.  This means that everything else held constant (ceteris paribus) more goods can be produced after the technological change.  The outward shift could also occur as a result of economic growth, which allows more production of both capital and consumer goods.  The graph below shows this change:

Increase in the PPF

It is also possible for a natural disaster to hit which destroys some of the inputs in the production process.  Imagine if a hurricane took out a factory, then we would see lower production in the economy as a result.  As long as the hurricane reduced the amount of inputs that the economy could use to produce outputs we would expect to see the PPF graph that looks like:

Decrease in the PPF

Likewise, if capital grows over time (because investment in new capital is larger than depreciation of old capital) , then we could see the PPF curve shift out (representing higher possibilities for production):

Rightward shift in the PPF

Point A shows a choice high in capital goods, which leads to large growth.
Finally, we could add some dynamics into the shifting process by allowing for a choice between capital goods, or consumption goods and analyze how much the PPF shifts out.  For example, if we choose to produce at point A (shown in the image to the right), then we will have a relatively low amount of consumption goods (pizza, clothes, parties, etc.) and a high amount of capital goods (roads, factories, schools and training), and this will cause the PPF curve to shift out quite a bit in the next time period.  However if we choose to produce at point B, everyone will be happy because they will have a lot of consumption (which gives us utility and thus makes us happy), but in the future we won't have as many capital goods, so the PPF doesn't shift out quite as far.

Point B shows a choice high in consumption goods, which leads to small growth.

Some believe that the United States is at a point closer to B than A right now because of the small investment we are seeing in capital goods.  Most people in the United States have a very small savings rate, and spend most of their money on food, entertainment, clothes, and other goods that need to be replaced every year.  This means that less money is being invested in capital goods which can then be used to produced more goods in the following year.

Additionally, when more money is saved, banks can use that money to invest in larger businesses or houses, which would be around for a long time and would increase our PPF by more.

The movie below shows examples of shifts in the PPF or PPC. If you need help developing your intuition about why the PPF shifts this video can help cement that understanding.