PPF

Production Possibility Frontier

Production Possibility Frontier (PPF): the curve showing the maximum combinations of goods or services that can be produced in a given time with available resources.

Assumptions:

-        Production over a specific time period like one year

-        Inputs are fixed during this time period

-        Technology doesn’t change during this time period

·       Meaning of points on and around the PPF—efficiency

When you are on the PPF, you are working at maximum efficiency or full capacity.

If you are within the PPF then you are under-utilising existing resources or resources are being used inefficiently. There is underemployment.

The economy cannot produce past the frontier. Points outside the PPF are unattainable given the current inputs.

·       Causes and meanings of shifts of the PPF and movements along it

Technological innovation shifts the frontier out.

An increase in the number of factors of production (resources) available. E.g. more capital

When an industry/economy achieves a rise in productivity more output can be produced from a given number of resources.

When the frontier shifts out, (long-term) economic growth is underway.

When there is a shift from a point of underemployment towards the frontier, there is economic expansion.

When you move along the frontier, opportunity cost is revealed. You can work out how much of one good you gain and how much of the other you lose when you move along the frontier.

·       Why is it curved?

      Law of Diminishing Returns. As you move along the curve you need to give up more of the good on the Y axis to gain the same amount of the good on the X axis, and the opportunity cost increases, hence the concave shape. As you increase the production of one good, the opportunity cost to produce the additional good will increase.

The opportunity cost increases/returns diminish because not all inputs are equally suited to producing different goods and services. Resources aren’t suited for all tasks.

-        The PPF demonstrates scarcity, as it presents the limits of what can be produced with the given resources.