Production Possibilities

Overview

Description

The production possibility frontier (PPF) shows the trade-off faced by an economy that produces two goods. Because the economy operates under scarcity (resources are limited compared to wants and needs), resources need to be allocated in order to produce. The PPF shows the maximum output combinations achieved when allocating resources fully and efficiently. It explores what can be produced with fixed available resources and technology. The PPF illustrates economic growth by shifting the curve to the right and exploring how an economy can produce more of both goods. The PPFs of two countries can be compared, and the PPF also can be used to illustrate the principles of comparative advantage and gains from trade.

At A Glance

  • A model can be used to help understand real-world relationships by simplifying the situation.
  • The production possibilities frontier shows the tradeoff of production between two goods.
  • The production possibility frontier illustrates productive efficiency by showing the combinations of resource use that will maximize production for the lowest possible cost.
  • Points outside the production possibilities frontier are not possible, while points inside it are not efficient.
  • Every production decision results in an opportunity cost: the value or benefit of the best alternative given up.
  • Economic growth can be illustrated using the production possibility frontier.
  • Shifts in the production possibility frontier can be to the right if the economy grows or to the left if the economy worsens.
  • Specialization and trade allow an economy to consume more of a specific good than it can produce.
  • The slope and shift of a production possibility frontier model provide useful information about an economy.