Product Possibility Frontiers
What is a Product Possibility Curve (PPF)?
PPF shows the different combinations of economic goods that an economy is able to produce if
all resources in the economy are fully and efficiently employed.
OPPORTUNITY COST
The production possibility frontier clearly illustrates
the principle of opportunity cost.
For example, in Figure 1 If the economy is producing
at Point C and is aiming to move on to Point D, we
see that the output of manufactured goods will
increase from 30 to 35 units. However, the
opportunity cost of that is the loss of output of non-
manufactured goods as it will reduce from 30 to 20
units. This clearly shows on how a choice is being
given up when trying to obtain both the
manufactured and non-manufactured goods.
MARGINAL COST
Opportunity cost can be illustrated through the use
of the concept of Margin.
Margin is a point of possible change.
At point C in Figure 1, the economy could produce more manufactured goods, but at the cost of
giving up non-manufactured goods. For example, the marginal cost of five more units of
manufactured goods (30 units to 35 units) would be 10 fewer units of non-manufactured goods
(30 units to 20 units). This is shown by the movement from C to D along the boundary.
ECONOMIC GROWTH OR DECLINE
The economy cannot produce at any point
outside its existing PPF. This is because the
PPF shows the maximum potential output of
an economy. However, the economy might be
able to move to the right of its PPF in the
future if there is economic growth. An
increase in the productive potential of an
economy is shown by a shift outward of the
PPF.
THE CAUSES FOR ECONOMIC GROWTH (which will cause the PPF to shift outwards and
increases product potential)
1. The quantity of resources available for production increases; for instance, there might
be an increase in the number of workers in the economy, or new factories and offices
might be built.
2. There is an increase in the quality of resources; education will make workers more
productive and technical progress will allow machines and production processes to
produce more with the same number of resources.
REASONS THAT CAUSE THE PPF TO SHIFT INWARDS (when the product potential falls)
1. A rapid fall in the number of workers in a population can reduce potential output.
2. Some environmentalists predict that global warming will damage world agriculture and
this will then affect all production.
3. Global warming could therefore lead to a shift inwards of the world’s PPF.
Many economies experience high levels of unemployment of
workers. Factories and machines may not be used when this
occurs. Production then occurs within the boundary and not on the
boundary such as at point F in Figure 1.
“Production at a point inside the PPF indicates an underuse or an
inefficient use of resources.”
CONSUMPTION VS INVESTMENT
Consumer goods vs Capital goods
Consumer goods - Goods and services that are used by people to
satisfy their needs and wants.
Capital Goods - goods that are used in the production of other
goods, such as factories, offices, roads, machines and equipment.
As country A produces more consumer goods and fewer capital
goods than country B. So initially, country A produces at point C
while country B produces at point D.
However, because country B has invested more, devoting more
of its finite resources to capital goods, it grows faster. Ten
years later, growth in country A has shifted its PPF to QQ and is
producing at point E. However, the PPF of country B has shifted Country A
to RR and country B is producing at point F.
Country B
At the start of the period, consumers in country A were wealthier than in country B because
consumption of consumer goods was
higher. But at the end, consumers in country B are wealthier. At point F, country B is producing
more of both consumer and capital goods than country A, which produces at point E.
EFFICIENCY
The production possibility frontier shows the maximum amount that can be produced from a
given number of resources. Therefore, for an economy, the boundary shows the level of output
where all resources are fully and efficiently employed.
Efficiency on the boundary is of two types.
1) Productive Efficiency
This is the type of production that takes place at a lowest cost.
Productive Efficiency occurs when a given set of resources are used to produce the
maximum number of goods.
All points on the boundary are productively efficient because they show a combination of
goods produced at the lowest cost for that combination.
2) Allocative Efficiency
Allocational, or allocative, efficiency is a property of an efficient market whereby all goods and
services are optimally distributed among buyers in an economy.
DIFFERENCE BETWEEN PRODUCTIVE & ALLOCATIVE EFFICIENCY
Productive efficiency is concerned with the optimal method of producing goods; producing
goods at the lowest cost. Allocative efficiency is concerned with the optimal distribution of
goods and services.
CHOICE
The PPF by itself gives no indication of which combination of goods will be produced in
an economy.
All it shows is the combination of goods which an economy could produce if output
were maximized from a given fixed number of resources.
