Production Possibility Curve

1
The production possibilities frontier is 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.
Production Possibility Frontier
Production Possibility Frontier

Assumptions

Scarce input and technology
Considering an economy which produces
only two economic goods
Economy is having full employment
2
3
People must make choices because of scarcity. If there were
no scarcity, there would be no need to study economics.
Scarcity

We want more than there is
Whenever a person or a society wants more than
they have, or more than they can produce, there is
scarcity.
Diamonds are a scarce good. River Water is a free good.

4
Scarcity means that we must choose among different
alternatives; we cannot have unlimited amounts of everything
Opportunity Cost

The opportunity cost of a chosen action is the loss of the
sacrificed alternative
Sacrificed money, time, and other stuff

The opportunity cost of buying a diamond necklace might be
a trip to Europe or purchasing a plot in Africa.

The opportunity cost of going to an 20-20 Cricket game might
be four hours of studying for the Economics Exam.
5
Example: Textbook costs $100
Pizza Pie costs $10
You have $300 to spend on textbooks & pizza pies
If you buy

0 books, you can buy 30 pizza pies
(0*$100 + 30*10 = $300)
1 book, you can buy 20 pizza pies
(1*$100 + 20*10 = $300)
The opp. cost of buying one textbook is the loss of 10
pizza pies
2 books, you can buy 10 pizza pies
(2*$100 + 10*$10 = $300)
The opp. cost of buying a second textbook is the loss
of 10 pizza pies
What happens if you buy 3 books?
0
10
20
30
40
0 1 2 3
Textbooks
P
i
z
z
a

P
i
e
s
6
The production possibilities frontier (PPF) illustrates the
ideas of scarcity and opportunity cost
Production Possibilities Schedule for Tanks and Wheat

Marginal Rate of Transformation : It is defined as the ratio of units of one good sacrificed for production
of an additional unit of other good. The opportunity cost of one unit of tanks is also the marginal rate of
transformation (MRT). The MRT can change, as it does in this case. If you want to make more tanks,
you need to make less wheat

7
The Production Possibility Frontier is a graph that shows all
the combinations of goods (or services) that can be produced
at maximum efficiency
Production Possibilities Frontier for Tanks and Wheat

PPF
0
5
10
15
20
0 1 2 3 4 5 6
Tanks (Thousands)
W
h
e
a
t

(
T
o
n
s
)
The line is the frontier.
All resources are being
used
Combinations of
Tanks and Wheat
outside the frontier
are not possible
Combinations of Tanks
and Wheat inside the
frontier are possible, but
inefficient
8
When an economy is inside its PPF, it is operating
inefficiently

PPF
0
5
10
15
20
0 1 2 3 4 5 6
Tanks (Thousands)
W
h
e
a
t

(
T
o
n
s
)
A
C
B
Point A is on the PPF:
15 tons of Wheat, 2
thousand Tanks
Point C is inefficient:
10 tons of Wheat, 2
thousand Tanks
Point B is inefficient:
15 tons of Wheat, 1
thousand Tanks
Note
negative
slope!
Reasons for inside shift of PPF
#Business cycle and depression
#Inefficiency and dislocation, strikes, political changes and revolution
9
Economies must choose how they want to allocate resources
efficiently
To Eat or To War? A Normative Question

PPF
0
5
10
15
20
0 1 2 3 4 5 6
Tanks (Thousands)
W
h
e
a
t

(
T
o
n
s
)
We can make lots of
food, but be vulnerable
to attack
We can be militarily
strong, but be very
hungry
10
Economic growth pushes the PPF out better combinations are
possible.

Economic growth - Means pushing out the PPF. The two key factors
that influence economic growth are technological progress and capital
accumulation.

PPF with new Wheat-making technology

PPF
0
10
20
30
40
50
60
0 1 2 3 4 5 6
Tanks (Thousands)
W
h
e
a
t

(
T
o
n
s
)
The old PPF
The new PPF, with
growth in Wheat-making
possibilities
The production possibility curve
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The production possibility curve illustrates the principle of opportunity
cost (shows the crucial economic notion of tradeoffs)

The production possibility curve can be used to illustrate the
production possibilities for an entire economy.

The production possibility curve helps in economys choice between
current consumption goods and investment or capital goods

The production possibility curve can be used to illustrate the
production possibilities for an individual or a firm.

The production possibility curve shows all possible combinations of
goods and services that can be produced with a given set of
resources.

Production Possibility Curve

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1

The production possibilities frontier is a graph

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