Production Possibilities Frontier:Economic Growth Analysis
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Alright, so we're gonna have a throw back here to the economic model of the production possibilities frontier. Do you guys remember what that looked like? Let's check it out. So the production possibilities frontier, That was the PPF that we learned earlier in this course, and that was talking about the maximum production that an economy can achieve. Right? So when we talked about the PPF, this being a PPF right here, let's say this is the economy's PPF. That could be the maximum they could achieve. So remember, they could put all of their resources here into capital goods production, they could put all their resources here into consumer, good production down here. Or they could make some sort of mix of the two along the curve. Right? So we think about the PPF this being the maximum they could achieve. What would you think would happen if there was economic growth? If there was economic growth, it would push the PPF outwards. So if this was PPF one and we experienced economic growth, we might see ourselves somewhere out here where we have a new PPF, somewhere further away from the origin, right? It gets pushed out to PPF to out here. Right, so now we've got a new PPF further away from the origin, you can do these different color, That being PPF one and then we push out with economic growth to a new PPF, further from the origin. So now we can produce more capital goods, if we just focus on capital, right? More consumer. If we focus on consumer or more in any kind of mix of the two. So when we see this economic growth here, how does this relate to to our discussion that we've had about economic growth? Well, what are the things that can push it outward? How can we push this PPF outward? Well, we're going to see that it's going to be affected by supply, demand and efficiency. So we'll go back to the graph in a second. But let's think about these factors here of supply, demand and efficiency and how they all have to work together to push the economic the PPF outwards with economic growth. So supply factors enable the economy to expand its potential G. D. P. So the potential of the economy expands, meaning we're able to push it outwards and what supply factors are involved here? Well, there could be an increase in the quality or the quantity of natural resources, so any natural resources that are available, maybe there's now they found a new oil deposit and they can use that to produce more things. Right? Well that could help push the the PPF outwards next. We could have an increase in the quantity or quality of human resources so far our citizens become more productive, right? We have more productive citizens. Maybe human capital, more educated citizens, Well that can push it out outwards, right, Our potential GDP can grow next is increase in the supply or stock of capital goods. So by investing in capital goods? Well that can increase our future productivity. right? By by investing in capital goods. Physical capital, Well, that's that's like an investment in our future, right? By building factories, building new things that are gonna help us produce more in the future. That is going to increase our potential GDP. And finally, of course, improvements to technology, right? When we see technology improve, that makes all of our physical capital more productive, Right? When we have new technology, So what does that do? The supply factors themselves are what push this, this uh PPF outwards, It gets us to to a new PPF, a new potential that we can reach. However, just by be having this potential doesn't mean that will reach it. So the supply helps us push it outwards, but the demand helps us get there. Okay, so the demand factor, it makes sure it has to match the growth, it must match the growth in production from supply factors. So the supply helps us push out and the demand has to match that growth. The households, businesses and government must purchase the, increased the increased output, right? If there's all of this, increased output, but no one's purchasing it, no one has enough money to buy it or whatever. Well then there's just gonna be unplanned, increased inventory, right? There's just gonna be things that we produced that we didn't sell, meaning in future years, we don't need to produce things because we already produce them. We already have the inventory, right? So the demand needs to match the supply for us to actually feel the economic growth, the supply allows it to happen, but the demand has to be there to match it. And finally, there's the efficiency factor. Remember when we talked about efficiency, we talked about two kinds of efficiency, productive efficiency and that's using the resources in the least costly way. So if we have new natural resources, right, we find a new oil deposit, well, we still need to use it efficiently. We can't just say, oh, we've got all this oil, let's just start having oil parties and just waste oil everywhere. Right? No, we need to stay efficient and use the state productively efficient uh to maximize our economic growth and allocated efficiency. Remember that that's basically using the resources in a way to match what the citizens want. We want to maximize the well being of the citizens, like we say here, so we want to produce the things that the citizens actually want. Okay, so what could happen is if just the supply factors happen, we could see this new PPF come further out here, but we could just be at this point right here, right? Maybe the demand. So at this point, the blue point, demand does not match supply. So we're not able to reach our potential because the demand is not there, they're not going to reach that full potential or efficiency as well, right? Maybe we're not getting to the efficient point there. There's there could be more production this way or more production this way, so efficiency not reached. So that's what happens. We need all of these uh to work together. So the supply factors, if we have one of those supply factors that increase in natural resources, human resource, help us push it outward, and then the demand and efficiency help the actual economy reach that new potential that the supply has created there. Cool. So this brings us back to that PPF curve and how the idea of economic growth factors in there. Cool. Alright. So that's about it here, let's go ahead and move on to the next one.