The Production Possibilities

Frontier (PPF)
Nishat Tasneem
Lecturer (Economics)
Department of Mechanical Engineering
Sonargaon University
The Production Possibilities Frontier (PPF)
• a graph that shows the combinations of output that the economy can
possibly produce given the available factors of production and the
available production technology
The Production Possibilities Frontier
• The production possibilities frontier
shows the combinations of output—in
this case, cars and computers—that
the economy can possibly produce.
The economy can produce any
combination on or inside the frontier.
Points outside the frontier are not
feasible given the economy’s
resources. The slope of the
production possibilities frontier
measures the opportunity cost of a
car in terms of computers. This
opportunity cost varies, depending on
how much of the two goods the
economy is producing.
The Production Possibilities Frontier
• The Figure shows this economy’s
production possibilities frontier.
If the economy uses all its
resources in the car industry, it
produces 1,000 cars and no
computers. If it uses all its
resources in the computer
industry, it produces 3,000
computers and no cars. The two
endpoints of the production
possibilities frontier represent
these extreme possibilities.
The Production Possibilities Frontier
• More likely, the economy divides
its resources between the two
industries, producing some cars
and some computers. For example,
it can produce 600 cars and 2,200
computers, as shown in the figure
by point A. Or, by moving some of
the factors of production to the car
industry from the computer
industry, the economy can produce
700 cars and 2,000 computers,
represented by point B.
The Production Possibilities Frontier
• Because resources are scarce, not every
conceivable outcome is feasible. For
example, no matter how resources are
allocated between the two industries, the
economy cannot produce the amount of
cars and computers represented by point
C. Given the technology available for
manufacturing cars and computers, the
economy does not have enough of the
factors of production to support that level
of output. With the resources it has, the
economy can produce at any point on or
inside the production possibilities
frontier, but it cannot produce at points
outside the frontier.
The Production Possibilities Frontier
The Production Possibilities Frontier
• An outcome is said to be efficient if the economy is getting all it can from
the scarce resources it has available. Points on (rather than inside) the
production possibilities frontier represent efficient levels of production.
When the economy is producing at such a point, say point A, there is no
way to produce more of one good without producing less of the other.
Point D represents an inefficient outcome. For some reason, perhaps
widespread unemployment, the economy is producing less than it could
from the resources it has available: It is producing only 300 cars and 1,000
computers. If the source of the inefficiency is eliminated, the economy can
increase its production of both goods. For example, if the economy moves
from point D to point A, its production of cars increases from 300 to 600,
and its production of computers increases from 1,000 to 2,200.
The Production Possibilities Frontier
• The production possibilities frontier shows one trade-off that society
faces. Once we have reached an efficient point on the frontier, the
only way of producing more of one good is to produce less of the
other. When the economy moves from point A to point B, for
instance, society produces 100 more cars but at the expense of
producing 200 fewer computers.
The Opportunity Cost
• The cost of something is what you give up to get it. This is called the
opportunity cost. The production possibilities frontier shows the
opportunity cost of one good as measured in terms of the other
good.
• When society moves from point A to point B, it gives up 200
computers to get 100 additional cars. That is, at point A, the
opportunity cost of 100 cars is 200 computers. Put another way, the
opportunity cost of each car is two computers.
The Opportunity Cost
• The opportunity cost of a car in terms of the number of computers is
not constant in this economy but depends on how many cars and
computers the economy is producing. This is reflected in the shape of
the production possibilities frontier.
• Because the production possibilities frontier in the figure is bowed
outward, the opportunity cost of a car is highest when the economy
is producing many cars and few computers, such as at point E, where
the frontier is steep. When the economy is producing few cars and
many computers, such as at point F, the frontier is flatter, and the
opportunity cost of a car is lower.