Production Possibilities

A Production Possibility Frontier (PPF), sometimes called a Production Possibilities Curve, is a graph that shows the various combinations of amounts of two goods that could be produced using the same fixed amount of resources.  Basically, if your economy is using most of its steel to create cars, it won't have much steel to make refrigerators or fighter jets. The PPF curve shows the maximum possible production level of one good for any given production level of the other, given the existing state of technology. By doing so, it defines efficiency (the point at which an economy using its resources to make the most goods and services).
 

A PPF can be used to illustrate a number of economic concepts, such as scarcity of resources, opportunity cost, and underutilization. In addition, an outward shift of the PPF results from growth of the availability of inputs such as physical capital or labour, or technological progress in our knowledge of how to transform inputs into outputs. Such a shift allows economic growth of an economy already operating at its full productivity (on the PPF), which means that more of both outputs can be produced during the specified period of time without sacrificing the output of either good. Conversely, the PPF will shift inward if the labor force shrinks, the supply of raw materials is depleted, or a natural disaster decreases the stock of physical capital. However, most economic contractions reflect not that less can be produced, but that the economy has started operating below the frontier—typically both labor and physical capital are underemployed. The combination represented by the point on the PPF where an economy operates shows the priorities or choices of the economy, such as the choice of producing more capital goods and fewer consumer goods or vice versa.

Key Vocabulary for Understanding PPF

Production Possibilities Curve - A curve that illustrates the production possibilities for the economy. A production possibilities curve (or PPC), like the one above, represents the boundary or frontier of the economy's production capabilities. We use this chart to demonstrate different production options and to measure efficiency and Opportunity Costs.

 

Efficiency - using resources to produce the most goods and services possible, without wasting time or effort or expense; an efficient choice is the best use of one's resources.

 

Underutilization - refers to a situation where an economy isn't using all of its resources productively (example: unused farm land, untapped oil reserves, unemployed workers, etc.)

 

Opportunity cost - the most valuable alternative given up when an economic choice is made; the cost of a possible opportunity that is given up when a trade-off is made. For example, if a city decides to build a hospital on vacant land that it owns, the opportunity cost is some other thing that might have been done with the land (a ball park, shopping mall, etc.).