1.1.4 PPF

• PPF stands for production possibility frontier.
• A PPF is a graph that shows the maximum production potential of an economy, assuming all output is consumed efficiently.
• PPF curves can show the opportunity cost of using scarce resources.
• If products is shown on the curve of a PPF, it is the most efficient combination of output.
• If products are shown inside the PPF curve, the resources are not being used to their full productive potential, and are therefore being used inefficiently.
• If products are shown outside of the PPF curve, their production is not yet attainable with the current resources.
• The 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

  The opportunity cost is 90 - 40 = 50 units of yoghurt

  
• The PPF can show economic growth and decline.

  Only production under or on the PPF attainable.

  Preduction outside of the PPF is not possible.

  Only production on the PPF is efficient (A and B)

  
• Economic growth can be shown by an outward shift in the PPF.
• Economic decline can be shown by an inward shift in the PPF.
• PPF’s Assumptions

  1. Fixed amount of resources being used.
  2. Constant state of technology
• An increase in the quality or quantity of resources shifts the PPF outwards, so the productive potential of the economy increases, and there is economic growth with the help of supply side policies.
• Causes of an inward shift in the PPF

  1. Decrease in quality or quantity of resources.
  2. Natural disasters
  3. Brain drain
• Moving along the PPF uses the same number and state of resources, shifting production from fewer consumer goods to more capital goods.
• Capital goods are good which can be used to produce other goods such as machinery.
• Consumer goods are goods which cannot be used to produce other goods such as clothing.