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Production Possibilities

Applying the PPF Model

The slope and shift of a production possibility frontier model provide useful information about an economy.
A production possibility frontier model can provide a variety of information. For example, the different growth rates of two countries can be modeled over time by comparing how their production possibility frontiers shift over time. A country with a faster rate of economic growth will have a PPF that shifts more to the right over time than a country with a slower rate of growth. Sometimes a PPF can have a parallel shift, where output of both goods increases, or it can have a pivot, where the maximum output of only a single good increases.
A country with a higher economic growth rate (Country B) shifts its production possibilities frontier (PPF) farther right than a country with a lower economic growth rate (Country A). Country B has a higher rate of economic growth than Country A, as shown by the greater shift to the right.
The slope of a production possibility frontier also provides information. A steep slope indicates a large opportunity cost—a large amount one good must be given up to gain a small amount of the other good. This case supports producing a mix of goods rather than specializing in one good because the economy gives up less of one good to produce the other good. The curve of the original PPF shows the increasing opportunity costs. If the PPF is a straight line, the opportunity costs remain the same as production switches from one good to the other.

A production possibility frontier that shifts to the left, indicates the economy is contracting and losing its ability to produce at the same level. One possible reason for this is a natural disaster, such as the hurricanes in 2017 that destroyed much of Puerto Rico and caused major damage in both Texas and Florida.

The production possibility frontier model can be used to illustrate the effect of one of these storms to show an economy producing inside its production possibility frontier. This shows the damage suffered is preventing the economy from maximizing production in the way it could before the hurricane. In this case, productive capacity has not been lost (the PPF has not moved), but it cannot be utilized efficiently. This short term effect of the storm would be shown as a point inside the PPF.

But what if the damage is more extensive, as it was in Puerto Rico? The effects could be very long-lasting, and as a result an economy's production possibility frontier could shift to the left over time.