1.1.4

• What is a productive possibility frontier?

  We usually use production possibility frontiers (PPFs) to show the maximum potential output combinations of two goods that an economy can achieve when all its resources are fully and efficiently employed.

  We can also use them to show the maximum potential output combinations of two goods that a firm can achieve, when it uses all of its resources efficiently.
• The PDF and economic efficiency

  Any point on the PDF represents a productively efficient allocation of scarce resources - all factors of production are being used in their most efficient way. Points inside the PPF represent an inefficient allocation of resources since it is more possible to produce more of one good without sacrificing any of the other.
• Shifts in the PPF

  A PPF will shift outwards if the firm, or economy gains more factors of production, or the quality of those factors of production improves (e.g. the economy has the same number of workers but they have received more training and education, so are more productive). If we draw a PPF and it shifts outwards it means that there is economic growth.
• Cause of an outward shift in the PPF

  Higher productivity/ efficiency of factor inputs

  Better management of factor inputs

  Increase in the stock of capital and labour supply

  Innovation and invention of new products and resources

  Discovery/ extraction of new natural resources (land)
• Inward shifts of a PPF


  This is cause by a fall in the productive potential of a country

  1. The damaging effects of severe natural disasters such as a tsunami, floods, persistent drought and other extreme wether events
  2. The economic damage caused by war and other types of conflict
  3. Large scale net migration of people out of a country
  4. A long-term fall in productivity of labour