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Chapter 2

The Production Possibilities Frontier (PPF) graphically shows the tradeoffs involved when an economy decides what combination of two goods to produce. It assumes an economy is using all of its resources and shows the maximum possible combinations of production as well as whether production is efficient or inefficient. The slope of the PPF represents the opportunity cost of choosing one good over another. Economic growth can be represented by an outward shift in the PPF as more resources become available.

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35 views21 pages

Chapter 2

The Production Possibilities Frontier (PPF) graphically shows the tradeoffs involved when an economy decides what combination of two goods to produce. It assumes an economy is using all of its resources and shows the maximum possible combinations of production as well as whether production is efficient or inefficient. The slope of the PPF represents the opportunity cost of choosing one good over another. Economic growth can be represented by an outward shift in the PPF as more resources become available.

Uploaded by

irdina athirah
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd

The Production Possibilities

Frontier
Wan Roshidah Fadzim
Introduction
• The Production Possibilities Frontier (PPF) is a
graph that shows all possible combinations of
two goods when an economy is producing at full
potential.
– It does not actually show reality, since it assumes
only two goods are produced.
– It is a simplification that shows what sort of trade-
offs would be made in reality.
– It only shows what can be produced – not what
would be consumed.
PPF for the Country ALPHA

A point on the
graph represents
how much of each
item is being
produced.
Guns
800

800
Butter
PPF for the Country ALPHA
The frontier shows the
limit of what can be
produced – all
possible combinations
when all resources are
fully utilized.
Guns

Butter
PPF for the Country ALPHA

All resources are


being used to
1500
produce guns.

Guns

Butter
PPF for the Country ALPHA

All resources are


being used to
1500
produce butter.

Guns

2000
Butter
Usually a point is chosen where both
items are being produced:
PPF for the Country ALPHA

1100
Guns

1500
Butter
Production may occur anywhere on
or within the frontier.
It may NOT occur beyond the
frontier– there are not enough
resources to do so.
PPF for the Country ALPHA

At point A (and
at any point on
A the frontier),
production is
EFFICIENT.
Guns

Butter
Efficient production means that all
resources are being fully employed to
produce the most goods and services
possible.
Therefore it is impossible to produce
more of one item without producing
less of the other.
PPF for the Country ALPHA
At point B (and
at any point
inside the
frontier),
production is
INEFFICIENT.
Guns B

Butter
Inefficient production means not all
resources are being fully employed – it is
still possible to increase production of
both goods.

This could occur during a recession or


depression, or in a developing
country.
The PPF can be used to show
tradeoffs.
Any two or more points on the
frontier represent tradeoffs.
PPF for the Country ALPHA
A and B represent
tradeoffs. A produces
A more guns, B produces
more butter.

Guns
B

Butter
The PPF can be used to show the
opportunity cost of choosing one
alternative over the other.
PPF for the Country ALPHA
The opportunity cost of
A equals the decrease
A in butter: 1100 units.
1400

Guns
B
800

600 1700
Butter
PPF for the Country ALPHA
The opportunity cost of
B equals the decrease
A in guns: 600 units.
1400

Guns
B
800

600 1700
Butter
The PPF can also show economic
growth by moving outward.
This may occur due to additional
resources, increasing population, or
new technology.
PPF for the Country ALPHA

Growth

Guns

Butter
Review
• Any point on the graph shows how much of both
goods is being produced.
• Efficiency is shown by whether the point is on the
curve (efficient) or within the curve (inefficient).
• Tradeoffs are shown by any two points on the curve.
• Opportunity cost is shown by the decrease in one
good when the other is increased.
• Growth is shown by the frontier moving outward.

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