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Understanding the Production Possibilities Frontier

The document summarizes the key concepts of a production possibilities frontier (PPF), which illustrates the tradeoffs between producing two goods given limited resources. It shows different points on a PPF curve representing combinations of clothing and food an economy could produce. The PPF can be used to demonstrate seven economic concepts: scarcity, choice, opportunity cost, productive efficiency, productive inefficiency, unemployment, and economic growth. Scarcity means wants exceed limited resources, forcing choices. Opportunity cost is the next best alternative given up. Productive efficiency occurs on the PPF curve while inefficiency is inside it. Unemployment results from inefficiency. Economic growth shifts the PPF curve outward.

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110 views2 pages

Understanding the Production Possibilities Frontier

The document summarizes the key concepts of a production possibilities frontier (PPF), which illustrates the tradeoffs between producing two goods given limited resources. It shows different points on a PPF curve representing combinations of clothing and food an economy could produce. The PPF can be used to demonstrate seven economic concepts: scarcity, choice, opportunity cost, productive efficiency, productive inefficiency, unemployment, and economic growth. Scarcity means wants exceed limited resources, forcing choices. Opportunity cost is the next best alternative given up. Productive efficiency occurs on the PPF curve while inefficiency is inside it. Unemployment results from inefficiency. Economic growth shifts the PPF curve outward.

Uploaded by

samio
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

Production Possibilities Frontier/ Curve (PPF/ PPC)

Production Possibilities Frontier (PPF): Represents the possible combinations of two goods
that can be produced in a certain period of time under the conditions of a given state of
technology and fully employed resources.

Point Clothing Food Opportunity cost of giving up food to produce 1 more unit of
s (unit) (unit) clothing (increasing opportunity cost)
A 0 20
B 1 19 1
C 2 17 2
D 3 13 4
E 4 8 5
F 5 0 8

Production Possibilities Frontier can be used to illustrate 7 economic concepts:

i. Scarcity
ii. Choice
iii. Opportunity cost
iv. Productive efficiency
v. Productive inefficiency
vi. Unemployment
vii. Economic growth
i. Scarcity: The condition in which our wants are greater than the limited resources available to
satisfy those wants.

ii. Choice: People have to make choices because of scarcity. Because our unlimited wants are
greater than our limited resources, some wants must go unsatisfied. We must choose which
wants we will satisfy and which we will not. Jeremy asks: Do I go to Hawaii or do I pay off my
car loan earlier? Ellen asks: Do I buy the new sweater or two new shirts?

iii. Opportunity cost: Opportunity cost is the sacrifice that must be made in order to obtain
something else.

iv. Productive efficiency: The condition where the maximum output is produced with given
resources and technology.

v. Productive inefficiency: The condition where less than the maximum output is produced with
given resources and technology. Productive inefficiency implies that more of one good can be
produced without any less of another good being produced.

vi. Unemployment: When the economy exhibits productive inefficiency, it is not producing the
maximum output with the available resources and technology. One reason may be that the
economy is not using all its resources; that are, some of its resources are unemployed, as at point
G in the above graph. When the economy exhibits productive efficiency, it is producing the
maximum output with the available resources and technology. This means it is using all its
resources to produce goods; its resources are fully employed, and none are unemployed. At the
productive efficient points A–F in the above graph, there are no unemployed resources.

vii. Economic growth: Economic growth refers to the increased productive capabilities of an
economy. It is illustrated by a shift outward in the production possibilities frontier. Two
major factors that affect economic growth are (1) an increase in the quantity of resources and (2)
an advance in technology.

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