1.1.4 Production possibility frontiers

• Production possibility frontiers (PPFs)


  Depict the maximum productive potential of an economy, using a combination of two goods or services, when resources are fully and efficiently employed
• PPF curves


  • Can show the opportunity cost of using the scarce resources
• Scarce resource is milk


  • Trade-off between producing more cheese or more yoghurt
• Points A and B

  Most efficient combinations of output on the PPF
• Producing at B (more yoghurt than cheese)

  Incurs an opportunity cost of producing more cheese
• Law of diminishing returns

  The opportunity cost of producing more yoghurt increases, in terms of the lost units of cheese that could have been produced
• Producing at C or D

  • Inefficient, resources are not used to their full productive potential
• Producing at E


  • Not yet attainable with the current resources
• This PPF shows the opportunity cost of producing each product. Producing 100 units of cheese means that only 40 units of yoghurt can be produced instead of the potential of 90. Therefore, the opportunity cost is 90 - 40 = 50 units of yoghurt.
• Economic growth and decline


  The PPF can depict economic growth or decline
• Production under and on the PPF


  • Attainable
• Production outside of the PPF

  • Not obtainable
• Production on the PPF


  • Uses resources efficiently
• Production below the PPF

  • Inefficient
• Economic growth


  Shown by an outward shift in the PPF
• Economic decline


  Depicted by an inward shift in the PPF
• Original PPF curve


  • Drawn assuming a fixed amount of resources and a constant state of technology
• Increase in quantity or quality of resources

  Shifts the PPF curve outwards, increases the productive potential of the economy, and results in economic growth
• Moving along the PPF


  Uses the same number and state of resources, shifts production from fewer consumer goods to more capital goods, incurs an opportunity cost
• Shifting the PPF curve outwards

  Uses either more resources or resources of a greater quality, reduces the opportunity cost of producing either capital or consumer goods, since more goods can be produced overall
• Capital goods


  Goods which can be used to produce other goods, such as machinery
• Consumer goods


  Goods which cannot be used to produce other goods, such as clothing