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.

Factors such as labor, capital and technology, among others, will affect the resources available, which will dictate where the production possibility frontier lies. The PPF is also known as the production possibility curve.

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.