One of the first topic areas that A-Level students learn about are PPF’s, these simple diagrams can help to show a multitude of basic economic concepts, such as opportunity cost, efficient and inefficient allocation of resources, and, growth. This growth can be displayed as short-run growth, which, occurs when we are using our available factor inputs more efficiently. For example, in the case of an economy, if labour is being used more efficiently then unemployment will decrease. Consequently, this will lead to point A moving to Point B on our PPF diagram as shown below.
Hence, once Point A moves to Point B, we are experiencing a more efficient allocation of resources. This can also infer short-run growth as this movement is the same as an expansion in aggregate demand as shown below on our long-run aggregate supply diagram.
As shown in the diagram, when employment in the economy rises, those who are newly employed see an increase in their disposable incomes. Consequently, this rise in disposable incomes will yield a rise in consumption as newly employed workers, who may have previously been on JSA, will go from buying inferior goods, such as frozen pizza, to purchasing normal goods, such as a takeaway. Hence, because consumption makes up 66% of aggregate demand when consumption rises due to increasing employment, short-run growth increases, thus illustrating how a movement in a PPF diagram to a more efficient allocation of resources yields short-run growth. At the same time, long-run growth can also be shown on a PPF diagram through an expansion in the productive capacity of the economy as shown below.
These expansions in productive capacity can either occur due to a rise in productivity, or, due to there being more factor inputs available for the economy to utilise. For example, in the case of labour, an increase in migration of people into a countries borders will lead to an expansion of the labour force, thus, because there is more labour available in the economy to produce goods and services, productive capacity expands. Improvements in productivity can also have a similar effect. In the case of Tesco’s self-checkouts, because each worker is now more productive (rather than having 10 cashiers you can now have one overlooking 10 self-checkouts) the increase in labour productivity attributed to improvements in technology in a weird way artificially increases the size of the labour force.
Therefore, clerks who previously worked on the normal checkouts can now allocate their labour to other areas of the economy, thus yielding an overall expansion in the number of goods and services the economy can produce.
However, we also learn of a contraction in the productive capacity of the economy, however, this is not as common to see in an exam as there are few documented cases that would be appropriate to introduce into an exam scenario. Yet, a recent article from the Financial Times may give examiners the opportunity to ask questions regarding a contraction in a countries productive capacity as the UK’s storm Arwen has left 30,000 households without power.
High winds, as well as snow caused by the storm, caused disruptions in large parts of the countries as 935,000 properties have had their power disrupted and restored as of 8 am on Wednesday, the financial time's report.
Network operators are to pay millions of pounds in compensation to the affected households. With each household being entitled to a £70 payment for every 12 hours of power, energy suppliers may have to pay out a good sum of money to ensure that each household is properly compensated.
The effect that Storm Arwen would have on the UK’s PPF would be a contraction in the productive capacity of the economy as Storm Arwen’s strong winds and snow would have led to the destruction of capital within the economy as in one site, 100 poles had been snapped in half. However, the contraction would have not been long, according to the ENA, engineers have been repairing damage at 4,500 sites, despite this, the temporary power outages would have still diminished the UK’s ability to produce goods and services. Thus reducing the productive capacity of the economy. This is because a lack of power may prevent certain households to perform tasks vital for their careers. For example, a junior analyst at a Bank will likely continue his spreadsheet work at home after hours, hence, a disruption in power will reduce his output as he can no longer do this. Furthermore, Storm Arwen’s power shortages may have also had unintended consequences on small businesses. For example, high street butcher stores will require power to ensure that their chillers are operating at the right temperatures to keep meat fresh. Many other businesses may also require power to perform basic tasks such as tracking inventory and re-ordering supplies.
Scottish and Southern Electricity Networks said its engineers had reported: “unprecedented damage” in the northeast of Scotland. With 1,000 points of damage so far in the region, Kwarteng told MPs he hoped that the “majority” of that hit would see power restored “in the next day or two”. “I would like to thank them for their fortitude,” he said. He promised to “look at the lessons we can learn in order to build ever more resilient power systems in the future”.
Written by Hubert Kucharski