Production Possibilities

Production Possibilities Frontier

The production possibilities frontier shows the tradeoff of production between two goods.
The production possibilities frontier is a model that shows the trade-off facing an economy producing two goods. It is an illustration of the choices an economy faces regarding production decisions, including how many items of a product to manufacture given the resources at hand. It starts from a basic concept of scarcity and choice: how are scarce, or limited, resources allocated to produce goods and services that satisfy unlimited wants and needs? A resource, in this case, can be defined as anything used to produce something else. Resources are also called inputs or factors of production. Resources include raw materials, such as land and other natural resources from the physical environment economies operate within, as well as human resources, such as the number of workers available. Time is also a resource that must be allocated because there are limited hours in a day. Finally, there is a given set of technology available to turn these resources into a final product (or output). Technology is the means, including tools, procedures, education, and knowledge, of transforming resources into a final product. A final product is defined as the result of the production process.

Productive Efficiency

The production possibility frontier illustrates productive efficiency by showing the combinations of resource use that will maximize production for the lowest possible cost.

The production possibility frontier (PPF) is used to find out if limited resources are used in the most efficient way. It illustrates productive efficiency: a situation in which the maximum possible production of one good is achieved without harming production of another good. It shows the trade-offs any economy faces and also helps ascertain whether an economy is being efficient in allocating these scarce resources to produce goods and services to satisfy its wants and needs. The PPF answers the question: Given limited available resources, and given the current state of technology available, how does an economy allocate scarce resources in order to produce most efficiently?

A remote island metaphor is a simplified version of this model. In the model Jerry, stranded alone on a remote island, is a one-person economy. In this economy, Jerry is going to allocate a certain amount of time to producing food—catching fish and gathering bananas. He wants both, so he has to produce both. But there is a trade-off: any time spent catching fish is time spent not gathering bananas and vice versa. Even with other resources available, time is limited, so Jerry is still operating under conditions of scarcity.

In the example of a one-person economy, two goods are produced: fish and bananas. Given this information, a PPF can be constructed: Given the number of bananas Jerry has gathered, he can catch a certain amount of fish. The PPF shows the trade-off between the two goods on a graph and the maximum amount of fish that can be caught given the number of bananas gathered. The PPF has a negative slope, showing that one good decreases as the other increases. Because this PPF is a straight line, it implies that the tradeoff for Jerry is constant. He gives up the same amount of bananas every time he catches one more fish.

Jerry's Production Possibility Frontier

The production possibility frontier shows the trade-off between the two goods in a graph. In this case, it shows the maximum amount of fish that can be caught given the number of bananas gathered. For example, Jerry can catch 10 fish and harvest 15 bananas, he can catch 20 fish and harvest 10 bananas, and so on.
For each number of fish Jerry has caught, he is limited in the number of bananas he can gather. Either setup yields the various bundles of final goods that make up production combinations: in this case, all possible combinations of fish and bananas that are produced given available resources and technology. Thus, Jerry must make choices about how many resources to spend on the production of either good.

One endpoint of the PPF shows the maximum number of fish that can be caught if Jerry allocates zero time to gathering bananas. The other endpoint shows the maximum number of bananas that can be gathered if zero time is allocated to catching fish. However, Jerry wants to have both goods, so it is unlikely that he will produce at either endpoint.

Possibility versus Efficiency

Points outside the production possibilities frontier are not possible, while points inside it are not efficient.

The PPF indicates both production possibility and efficiency. Every combination that lies on or inside Jerry's production possibility frontier is possible. These are all combinations he can produce given available time and technology.

But the production points inside the frontier are not an efficient use of Jerry's time. At any point inside the frontier where Jerry is not using all available resources (in this case, time), he is inefficiently using his resources. If Jerry gathers only a few bananas, he should catch more fish in order to reach efficiency.
The production possibility frontier shows which combinations are both efficient and possible. For example, catching 10 fish and harvesting 10 bananas is not efficient, because Jerry has the resources to both catch more fish and harvest more bananas at the same time. Catching 30 fish and harvesting 20 bananas is not possible, because Jerry has limited resources. Catching 20 fish and harvesting 10 bananas is both possible and efficient.
Any production point on the frontier is both possible and efficient. A society may prefer one point over the other along the PPF, based on what it values as important. For instance, the Champagne Valley of France, a region known for making wine, may prefer wine production over basket production, representing allocative efficiency, an economic state in which production matches consumer preference. In the example about Jerry, the production points maximize Jerry's use of resources. By producing on the frontier, he is catching the most fish possible given the amount of bananas he has gathered.

All production points outside Jerry's PPF are desirable: Jerry would like to have more of both goods, but this is not possible right now. Given available resources and technology, Jerry is constrained in his ability to produce; hence why the line is called the production possibility frontier. It shows the best Jerry can do given his current constraints. Even though Jerry would like to produce outside his frontier, the best he can do is produce at a point on his frontier.