Production possibility frontiers

A production possibility frontier, or PPF, (also known as a production possibility curve or boundary) shows the possible combinations of two goods that can be produced using all an economy’s resources.

PPFs are used to explain several economic concepts, including efficiency, choice and opportunity cost.

Opportunity cost refers to the cost of a given decision expressed in terms of the sacrifice made - more formally, opportunity cost can be quantified in terms of the next best alternative forgone.

Figures for possible combinations can be shown in a PPF schedule, as shown below:

Production possibility frontiers

The combinations can be shown through a PPF, as show:

Taking this example, increasing a given quantity of capital goods, from X0 to X1, leads to a small loss of consumer goods, Y12 to Y11 - hence the opportunity cost is ‘1Y’. Increasing X by a further given amount, X1 to X2, leads to a loss of 2 units of Y -Y11 to Y9 - with an opportunity cost of ‘2Y’, and the economy moves from point 'a' to point 'b'

Production possibility frontiers

Increasing capital goods from X2 to X3 creates an opportunity cost of ‘3Y’, and finally increasing capital goods to X4 creates an opportunity cost of ‘6Y’.

The opportunity cost of a decision to increase the production of X is expressed in terms of the loss of Y, and increases as more goods are produced.

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Production possibiliy

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