Production Possibility Frontiers

Test yourself on Production Possibility Frontiers

Test your knowledge with free interactive questions on Seneca — used by over 10 million students.

Features of the Production Possibility Curve

The production possibilities frontier (PPF) model explains the constraints experienced by society. Only a finite amount of goods & services can be produced with a fixed amount of resources.

Details of the PPF

The PPF shows economy at its maximum productive potential.
Society can choose any two goods on or inside the PPF.
The opportunity cost is the slope of the PPF.
The PPF is curved because of the law of diminishing returns.
- As you increase units of one resource and keep other factors constant, the marginal benefit from the extra units will eventually start to decline.

PPF and economic growth

The PPF shifts outward if there is economic growth.
This is because the productive capacity of the economy has increased.
- E.g. this could be caused from improvements in technology.
But this improvement isn't necessarily equal across all products.
- E.g. an improvement in the technology to produce cars isn't necessarily going to affect the ability to produce butter.

PPF and trade-offs

The trade-offs occur when producing on the PPF.
To produce more of one good, you must produce less of another.
For example, if an economy is producing at point A and wants to increase the number of Good X they produce, they must give up producing some of good Y.
The PPF shows the economy working at its maximum potential.
If there are any points underneath the PPF, this means not all economic resources are being deployed.

PPF and productive efficiency

Point A is a point outside the PPF. It is not currently possible to produce at this point.
Point B is a point on the PPF. At this point, all available factors of production are being fully used. All points along the PPF like point B are productively efficient.
Point C is inside the PPF. At this point, there are factors of production being underemployed.

Efficiency and the Production Possibility Frontier

Every point on the Production Possibility Frontier (PPF) is productively efficient. Not every point is allocatively efficient.

Efficiency

Efficiency refers to a lack of waste.
Static efficiency refers to the efficiency at a point in time.
This can be separated into allocative and productive efficiency.

Productive efficiency

With all available inputs and technology, it is impossible to produce more of one good without decreasing the quantity of another good being produced.
So, every point on the PPF is productively efficient.

Allocative efficiency

This occurs when a specific combination of goods is efficient for society.
As this is a specific combination of goods, it refers to a point on the PPF, not the entire curve.
So, not every point on the PPF is allocatively efficient.

Shifting the Production Possibility Frontier

Economic growth is shown by an outward shift. Negative economic growth is shown by an inward shift.

Reallocating resources

If there is a fixed amount of resources, then movements along the PPF reflect the reallocation of resources.

Changing resources

When the total level of resources changes, the PPF shifts.
- Increasing resources - PPF shifts outwards as output increases (economic growth).
- Decreasing resources - PPF shifts inwards as output decreases (negative economic growth).

Improvements in technology

When resources are fixed but output increases (e.g. through improving labour or technology), the PPF shifts outwards.
- So an outward shift reflects economic growth.

Capital vs consumer goods

Goods can be split into two groups:
- Capital goods.
- Consumer goods.
There is an opportunity cost in producing these goods. For example, if we increase the output of capital goods, we cannot produce as many consumer goods.
But if a country invests in increasing capital goods, the economy's productive capacity can increase and the PPF curve can shift outwards.