Reading: Production Possibilities Frontier
BREAKING
DOWN 'Production Possibility Frontier - PPF'
The PPF indicates the production
possibilities of two commodities when resources are fixed. This means that the
production of one commodity can only increase when the production of the other
commodity is reduced, due to the availability of resources. Therefore, the PPF
measures the efficiency in which two commodities can be produced together,
helping managers and leaders decide what mix of commodities are most
beneficial. The PPF assumes that technology is constant, resources are used
efficiently, and that there is normally only a choice between two
commodities.
Production Possibilities Curve
The PPF drives home the idea that
opportunity costs normally come up when an economic organization with limited
resources must decide between two alternatives. The PPF is depicted graphically
as an arc, with one commodity on the X axis and the other commodity on the Y
access. At each point on the arc, there is an efficient number of the two
commodities that can be produced with available resources. Therefore, it's up
to the organization to look at the PPF and decide what number of each commodity
should be produced to maximize the overall benefit to the economy.
PPF
Schedule
Scenario Rabbits Berries
A 5 0
B 4 100
C 3 180
D 2 240
E 1 280
F 0 300
The PPF shows scarcity, tradeoffs,
opportunity cost, and efficiency.
This graph shows scarcity because a firm
cannot produce anywhere outside of the curve due to limited resources.
Tradeoffs are evident because a firm must
give up at least one commodity to produce more of another.
Opportunity cost is shown by the specific number of a commodity given up when a firm produces another unit of some other commodity.
The curve represents maximum production efficiency. Anywhere inside the curve
is inefficient because more units could be produced with the resources on hand.
Anywhere outside the curve is unobtainable, as the firm’s resources are too
limited and cannot produce beyond the curve.