The%20Production%20Possibilities%20Frontier

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The Production Possibilities Frontier
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Introduction

• The Production Possibilities Frontier (PPF) is a
  graph that shows all possible combinations of two
  goods when an economy is producing at full
  potential.
• It does not actually show reality, since it
  assumes only two goods are produced.
• It is a simplification that shows what sort of
  trade-offs would be made in reality.
• It only shows what can be produced not what
  would be consumed.

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Examples of Two Goods

• Capital Goods- manufactured goods used to produce
  other goods and services
• GUNS, because you can use them to get more
  resources.
• Consumer Goods- intended for final use by
  individuals
• BUTTER, because people eat it and its gone

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PPF for the Country ALPHA
All resources are being used to produce guns.
1500
Guns
Butter
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PPF for the Country ALPHA
All resources are being used to produce butter.
1500
Guns
2000
Butter
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Usually a point is chosen where both items are
being produced
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PPF for the Country ALPHA
1100
Guns
1500
Butter
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Production may occur anywhere on or within the
frontier.

• It may NOT occur beyond the frontier there are
  not enough resources to do so.

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PPF for the Country ALPHA
At point A (on the frontier), production is
EFFICIENT.
A
Guns
Butter
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Efficient production means that all resources are
being fully employed to produce the most goods
and services possible.

• Therefore it is impossible to produce more of one
  item without producing less of the other.

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PPF for the Country ALPHA
At point B (inside the frontier), production is
INEFFICIENT.
B
Guns
Butter
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Inefficient production means not all resources
are being fully employed it is still possible
to increase production of both goods.

• This could occur during a recession or
  depression, or in a developing country.

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The PPF can be used to show tradeoffs.

• Any two or more points on the frontier represent
  tradeoffs.

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PPF for the Country ALPHA
A and B represent tradeoffs. A produces more
guns, B produces more butter.
A
B
Guns
Butter
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The PPF can be used to show the opportunity cost
of choosing one alternative over the other.
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PPF for the Country ALPHA
The opportunity cost of A equals the decrease in
butter 1100 units.
A
1400
B
Guns
800
1700
600
Butter
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PPF for the Country ALPHA
The opportunity cost of B equals the decrease in
guns 600 units.
A
1400
B
Guns
800
1700
600
Butter
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The PPF can also show economic growth by moving
outward.

• This may occur due to additional resources,
  increasing population, or new technology.

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PPF for the Country ALPHA
Growth
Guns
Butter
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Review

• Any point on the graph shows how much of both
  goods is being produced.
• Efficiency is shown by whether the point is on
  the curve (efficient) or within the curve
  (inefficient).
• Tradeoffs are shown by any two points on the
  curve.
• Opportunity cost is shown by the decrease in one
  good when the other is increased.
• Growth is shown by the frontier moving outward.
• Constant opportunity cost- is a constant decrease
  and increase up the line