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The Production Possibilities FrontierPowerPoint Presentation

The Production Possibilities Frontier

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The Production Possibilities Frontier

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The Production Possibilities Frontier

- 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.

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

Guns

800

800

Butter

The frontier shows the limit of what can be produced – all possible combinations when all resources are fully utilized.

Guns

Butter

All resources are being used to produce guns.

1500

Guns

Butter

All resources are being used to produce butter.

1500

Guns

2000

Butter

Usually a point is chosen where both items are being produced:

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.

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

A

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.

At point B (and at any point inside the frontier), production is INEFFICIENT.

B

Guns

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.

A and B represent tradeoffs. A produces more guns, B produces more butter.

A

B

Guns

Butter

The PPF can be used to show the opportunity cost of choosing one alternative over the other.

The opportunity cost of A equals the decrease in butter: 1100 units.

A

1400

B

Guns

800

600

1700

Butter

The opportunity cost of B equals the decrease in guns: 600 units.

A

1400

B

Guns

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.

Growth

Guns

Butter

- 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.