PA 103: Introduction to

Microeconomics

Md. Roni Hossain

Lecturer
Department of Economics
Jahangirnagar University
 Lecture 3
The Production Possibilities Frontier
 The Production Possibilities Frontier

 The Production Possibilities Frontier

• The production possibilities frontier shows the combinations
of two goods (output) that the economy can possibly produce
given the available factors of production and the available
production technology.

• We use production possibilities frontier to illustrate some basic

economic ideas such as scarcity, tradeoffs, choice, opportunity
costs, efficiency, inefficiency, economic growth etc.

• Although real economies produce thousands of goods and

services, we assume an economy that produces only two
goods – jutes and computers.
 The Production Possibilities Frontier

 The Straight-Line PPF: Constant Opportunity Costs

 The Production Possibilities Frontier

 The Straight-Line PPF: Constant Opportunity Costs

 The line that connects points A–E is the production
possibilities frontier.

 Notice that the production possibilities frontier is a straight

line. This is because the opportunity cost of books and shirts
(in our example) is constant.

Straight-line PPF = Constant opportunity costs

 The Production Possibilities Frontier

 The Straight-Line PPF: Constant Opportunity Costs

 To illustrate what constant opportunity costs means, suppose
the economy were to move from point A to point B.

 At point A, 4 books are produced and 0 shirts; at point B, 3

books are produced and 1 shirt.

 What does the economy have to forfeit (in terms of books) to

get 1 shirt?

 The answer is 1 book. We conclude that moving from point A to

point B, the opportunity cost of 1 shirt is 1 book.
 The Production Possibilities Frontier

 The Straight-Line PPF: Constant Opportunity Costs

 Now let’s move from point B to point C. At point B, 3 books and
1 shirt are produced; at point C, 2 books and 2 shirts are
produced.

 What does the economy have to forfeit (in terms of books) to

get another shirt?

 The answer is 1 book. We conclude that moving from point B to

C, the opportunity cost of 1 shirt is 1 book.

 In fact, when we move from C to D or from D to E, we also

notice that the opportunity cost of 1 shirt is 1 book.
 The Production Possibilities Frontier

 The Straight-Line PPF: Constant Opportunity Costs

 This is what we mean when we speak of constant opportunity
costs: The opportunity cost of 1 shirt is always 1 book.

 And because of constant opportunity costs, the PPF in Exhibit

1(b) is a straight line.

 When opportunity costs are not constant, the PPF will not be a
straight line.
 The Production Possibilities Frontier

 The Bowed-Outward (Concave-Downward) PPF:

Increasing Opportunity Costs
 The Production Possibilities Frontier

 The Bowed-Outward (Concave-Downward) PPF:

Increasing Opportunity Costs
 In this case, the production possibilities frontier is bowed
outward (concave downward) because the opportunity cost of
coffee makers increases as more coffee makers are produced.

Bowed-outward PPF = Increasing opportunity costs

 To illustrate, let’s start at point A, where the economy is

producing 10 cell phones and 0 coffee makers and move
to point B, where the economy is producing 9 cell phones
and 1 coffee maker.
 The Production Possibilities Frontier

 The Bowed-Outward (Concave-Downward) PPF:

Increasing Opportunity Costs
 What is the opportunity cost of a coffee maker moving from
point A to point B?

 The answer is 1 cell phone.

 Now let’s move from point B to point C. At point B, the

economy is producing 9 cell phones and 1 coffee maker; at
point C, the economy is producing 7 cell phones and 2 coffee
makers.
 The Production Possibilities Frontier

 The Bowed-Outward (Concave-Downward) PPF:

Increasing Opportunity Costs
 What does the economy have to forfeit (in terms of cell phones)
to get 1 additional coffee maker?

 The answer this time is 2 cell phones.

 We conclude that moving from point A to B and from B to C, the

opportunity cost increases.

 If we were to continue producing additional coffee makers, we

would see that we would have to give up increasingly more cell
phones.
 The Production Possibilities Frontier

 Law of Increasing Opportunity Costs

 In the real world, most production possibilities frontiers are
bowed outward. In other words, for most goods, the
opportunity costs increase as more of a good is produced.

 This is referred to as the law of increasing opportunity costs.

 The opportunity costs increase as more of most goods is

produced because people have varying abilities and factors of
production are not perfectly substitutes.

 Exhibit 3 summarizes this points.

 The Production Possibilities Frontier

 Law of Increasing Opportunity Costs

 The Production Possibilities Frontier

 Economic Concepts in a PPF Framework

 Scarcity
 Recall that scarcity is the condition where the wants (for goods)
are greater than the resources available to satisfy them.

 The finiteness of resources is graphically portrayed by the PPF.

 The PPF separates the production possibilities of an economy

into two regions:
(1) an attainable region, which consists of the points on the PPF
itself and all points below it (this region includes points A to F),
(2) an unattainable region, which consists of the points above and
beyond the PPF (such as point G).
 The Production Possibilities Frontier

 Economic Concepts in a PPF Framework

 Scarcity
 The Production Possibilities Frontier

 Economic Concepts in a PPF Framework

 Choice and Opportunity Cost
 Note that within the attainable region, individuals must choose
the combination of the two goods they want to produce.

 Obviously, hundreds of combinations exist, but let’s consider

only two, represented by points A and B.

 Which of the two will individuals choose? They can’t be at both

points; they must make a choice.

 Opportunity cost is illustrated as we move from one point to

another on the PPF.
 The Production Possibilities Frontier

 Economic Concepts in a PPF Framework

 Choice and Opportunity Cost
 The Production Possibilities Frontier

 Economic Concepts in a PPF Framework

 Choice and Opportunity Cost
 Suppose we are at point A and choose to move to point B.

 At A, we have 55,000 television sets and 5,000 cars; at point B,

we have 50,000 television sets and 15,000 cars.

 What is the opportunity cost of a car?

 Because 10,000 more cars come at a cost of 5,000 fewer

television sets, the opportunity cost of 1 car is 1/2 television
set.
 The Production Possibilities Frontier

 Economic Concepts in a PPF Framework

 Productive Efficiency and Inefficiency
 Economists often say that an economy is productive efficient if
it is producing the maximum output with the given resources
and technology.

 In figure, points A, B, C, D, and E are all productive-efficient

points. Notice that all these points lie on the production
possibilities frontier.

 In other words, we are getting the most (in terms of output)

from what we have (in terms of available resources and
technology.)
 The Production Possibilities Frontier

 Economic Concepts in a PPF Framework

 Productive Efficiency and Inefficiency
 The Production Possibilities Frontier

 Economic Concepts in a PPF Framework

 Productive Efficiency and Inefficiency
 It follows that an economy is productive inefficient if it is producing
less than the maximum output with given resources and technology.

 In figure, point F is a productive inefficient point.

 It lies below the production possibilities frontier; it is below the

outer limit of what is possible.

 In other words, we can produce more goods with the available

resources, or we can get more of one good without getting less of
another.
 The Production Possibilities Frontier

 Economic Concepts in a PPF Framework

 Unemployed Resources 
 When the economy exhibits productive inefficiency, it is not
producing the maximum output with the available resources
and technology.

 One reason may be that the economy is not using all its
resources; that is, some of its resources are unemployed, as at
point F.

 When the economy exhibits productive efficiency, it is using all

its resources to produce goods; its resources are fully
employed, and none are unemployed.
 The Production Possibilities Frontier

 Economic Concepts in a PPF Framework

 Unemployed Resources 
 The Production Possibilities Frontier

 Economic Concepts in a PPF Framework

 Economic Growth
 Economic growth refers to the increased productive capabilities
of an economy.

 It is illustrated by a shift outward in the production possibilities

frontier.

 Two major factors that affect economic growth are (1) an increase
in the quantity of resources and (2) an advance in technology.

 An increase in the quantity of resources (e.g., through a discovery

of new resources) makes a greater quantity of output possible.
 The Production Possibilities Frontier

 Economic Concepts in a PPF Framework

 Economic Growth
 In figure, an increase in the quantity of resources makes it
possible to produce both more military goods and more civilian
goods.

 Thus, the PPF shifts outward from PPF1 to PPF2.

 The Production Possibilities Frontier

 Economic Concepts in a PPF Framework

 Economic Growth
 An advance in technology commonly increases the ability to
produce more output with a fixed quantity of resources or the
ability to produce the same output with a smaller quantity of
resources.

 For example, suppose an advance in technology allows the

production of more of both military goods and civilian goods
with the same quantity of resources.

 As a result, the PPF in Exhibit 6(a) shifts outward from PPF 1 to

PPF2. The outcome is the same as when the quantity of
resources is increased.
 The Production Possibilities Frontier

 Economic Concepts in a PPF Framework

 Economic Growth
 If the advance in technology allows only more of one good
(instead of both goods) to be produced with the same quantity of
resources, then the PPF shifts outward, but not in the same way
as shown in panel (a).

 To illustrate, suppose an advance in technology allows only more

civilian goods to be produced but not more military goods.

 Therefore, the maximum amount of military goods that can be

produced does not change, but the maximum amount of civilian
goods rises. This gives us the shift from PPF 1 to PPF2 shown in
panel (b).
 The Production Possibilities Frontier

 Economic Concepts in a PPF Framework

 Economic Growth
 The Production Possibilities Frontier

 Economic Concepts in a PPF Framework

 Readings
 Roger A. Arnold- Microeconomics, 10th Edition,
Chapter – 2.
Thank You