The Production Possibilities Frontier
In economics, the production possibilities frontier (PPF) is a graph which shows the combinations of output an economy can possibly produce given the available factors of production (natural, capital, and human resources) and the available production technologies that can be used to turn these factors into output. To keep this model simple, we assume the economy produces only two types of output: Product A and Product B, both of which require the same factors of production.The PPF illustrates many basic economic principles, including: scarcity, tradeoffs, efficiency, opportunity cost, and economic growth.
Scarcity and Tradeoffs
Scarcity refers to the idea that society has limited resources and so cannot produce all of the goods and services that people wish to have. Because the factors of production are scarce, the economy faces a tradeoff between the production of Product A and the production of Product B - in order to produce more of A, a greater proportion of the fixed amount of resources must be dedicated to the production of A, thereby reducing the amount of resources available for the production of B.
Efficiency refers to how well the economy is using its available factors of production and production technologies. Because resources are scarce, some combinations of output are simply not possible, no matter how the resources are allocated between the production of Product A and the production of Product B. These unattainable combinations are represented by points lying outside the production possibilities frontier. On the other hand, points lying on or inside the PPF represent attainable combinations of output: they are possible to achieve given the currently available resources and technology. Points lying on the PPF itself are said to be efficient because the economy is using the available factors of production to their maximum potential - there is no way to produce more of one product without producing less of the other. Points lying inside the curve are said to be inefficient because the economy is producing less than it possibly could given the available resources, likely indicating the underemployment of a key factor of production (such as high unemployment within the labor force).
The scarcity of resources and trade-off in production levels of Products A and B relates to the fundamental economic concept of opportunity cost, which is defined as the cost of any activity in terms of the value of the next best alternative. In this case, opportunity cost is measured as the number of units of one product sacrificed to produce more units of the other product. The slope of the production possibilities frontier measures marginal opportunity cost: the number of units of B which must be forgone to produce one additional unit of A.
As in the plot below, PPFs usually have a concave shape which bows outward to illustrate the idea of rising opportunity costs. When the economy is producing few units of A and many units of B, and the frontier is relatively flat, the opportunity cost of an additional unit of A is low. But, when the economy is producing many units of A and few units of B, and the frontier is relatively steep, the opportunity cost of one additional unit of A is much higher.
Although it is not as common, a PPF can also be depicted as a convex shape which bows inward to illustrate falling opportunity costs (due to economies of scale), or a straight-line to illustrate constant opportunity costs (as is likely when resources are not specialized and can act as perfect substitutes for each other).
The tradeoff between the outputs of different products can change over time. In the long run, an improvement in production technology or an increase in the supply or productivity of a factor of production will increase the economy's capacity to produce both goods. This type of economic growth is depicted as an outward shift of the production possibilities frontier.
The following graph shows a production possibilities frontier. Use the radio buttons to choose which economic principle to investigate. Click and drag your mouse on the plot to view different production combinations.
Units of Product A:
Units of Product B:
Marginal Opportunity Cost (of A in terms of B):
MathApps/Finance and Economics
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