The Production Possibilities Frontier/Curve (PPF/PPC)
✓ The Production Possibilities Frontier (PPF) is a graph that shows all the different combinations of the
output of two goods that can be produced using available resources and technology. The PPC can be used to
illustrate the concepts of scarcity, opportunity cost, efficiency, inefficiency, economic growth, and
contractions.
✓ The Production Possibilities Curve (PPC) is a model that captures scarcity and the opportunity costs of
choices when faced with the possibility of producing two goods or services. Points on the interior of the PPC
are inefficient, points on the PPC are efficient, and points beyond the PPC are unattainable. Points that
lie on the PPF illustrate combinations of output that are productively efficient. The opportunity cost of
moving from one efficient combination of production to another efficient combination of production is how
much of one good is given up in order to get more of the other good.
✓ The shape of the PPF depends on whether there are increasing, decreasing, or constant opportunity costs.
✓ Opportunity Cost: the value of the next best alternative to any decision you make; for example, if Mr. Khan
can spend her time either watching videos or studying, the opportunity cost of an hour watching videos is the
hour of studying she gives up to do that.
✓ Efficiency: The full employment of resources in production; efficient combinations of output will always be
on the PPC.
✓ Inefficient use (under-utilization) of resources: The underemployment of any of the four economic
resources (land, labor, capital, and entrepreneurial ability); inefficient combinations of production are
represented using a PPC as points on the interior of the PPC.
✓ Economic Growth: An increase in an economy's ability to produce goods and services over time; economic
growth in the PPC model is illustrated by a shift out of the PPC.
✓ Productivity: (also called technology) the ability to combine economic resources; an increase in productivity
causes economic growth even if economic resources have not changed, which would be represented by a shift
out of the PPC.
✓ Economic Contraction: A decrease in output that occurs due to the under-utilization of resources; in a
graphical model of the PPC, a contraction is represented by moving to a point that is further away from, and
on the interior of, the PPC.
Some Graphs related to PPC/PPF:
Graph 01: PPC (Explain point A, B, C, D, X)
Graph 02: PPC (Explain point A, B, C, D, E, F, G)
Graph 03: PPC With Constant Opportunity Cost
Graph 04: PPC With decreasing Opportunity Cost
Graph 05: PPC Explaining Economic Growth
Graph 06: PPC Explaining Economic Contraction
Practice Questions
Q1.
Using available resources and technology, different combinations of production of Goods X and Goods Y are given in
the following list:
Product X Product Y Combinations
0 100 A
40 90 B
80 60 C
120 0 D
a. Define PPC. Draw a PPC from the combinations given in the above schedule.
b. Is it possible to produce 80 units of X and 80 units of Y? Is it Rational to Produce 40 units of X and 75 Units of Y?
Justify Your answer.
c. Which types of Opportunity Costs does this schedule exhibit? Explain by providing the definition.
Q2.
a. Define scarcity and explain how it is represented on the PPC.
b. Describe the significance of points outside the PPC and explain why they are unattainable for an economy.
c. Define opportunity cost and discuss how it is reflected in the PPC.
d. Explain what it means for an economy to be operating on the PPC and why it represents efficiency.
e. Describe the concept of inefficiency in the context of the PPC and explain what it signifies for an economy.
f. Discuss how economic growth is illustrated on the PPC and explain the factors that can lead to an outward shift of
the curve.
g. Explain how economic contractions are depicted on the PPC and discuss the factors that can cause an inward shift
of the curve.
h. Discuss how technological advancements can impact the PPC and the potential effects on an economy's production
possibilities.
