The production possibilities frontier
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The Production Possibilities Frontier. 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.

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The Production Possibilities Frontier

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The production possibilities frontier

The Production Possibilities Frontier


Introduction

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

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 alpha1

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 alpha2

PPF for the Country ALPHA

All resources are being used to produce guns.

1500

Guns

Butter


Ppf for the country alpha3

PPF for the Country ALPHA

All resources are being used to produce butter.

1500

Guns

2000

Butter


Usually a point is chosen where both items are being produced

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


Ppf for the country alpha4

PPF for the Country ALPHA

1100

Guns

1500

Butter


Production may occur anywhere on or within the frontier

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 alpha5

PPF for the Country ALPHA

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

A

Guns

Butter


The production possibilities frontier

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 alpha6

PPF for the Country ALPHA

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

B

Guns

Butter


The production possibilities frontier

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

The PPF can be used to show tradeoffs.

Any two or more points on the frontier represent tradeoffs.


Ppf for the country alpha7

PPF for the Country ALPHA

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


Ppf for the country alpha8

PPF for the Country ALPHA

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

A

1400

B

Guns

800

600

1700

Butter


Ppf for the country alpha9

PPF for the Country ALPHA

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

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 alpha10

PPF for the Country ALPHA

Growth

Guns

Butter


Review

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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