PPFs (Production possibility frontier)

• 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
  • Points A and B are the most efficient combinations of output on the PPF
  • Producing at B 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, and resources are not used to their full productive potential
  • There is the potential to use these resources more efficiently, which would shift production closer to the curve
• Producing at E is 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


  Shown by an outward shift in the PPF
• Economic decline


  Shown 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, so the productive potential of the economy increases, and there is economic growth
• Moving along the PPF

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

  Uses either more resources or resources of a greater quality, reducing the opportunity cost of producing either capital or consumer goods
• If the PPF is a straight line, the marginal opportunity cost is constant
• Concave shape of the PPF

  Shows increasing opportunity cost, which is more realistic than the straight line