A PPF illustrates several economic concepts, such as allocative efficiencyeconomies of scaleopportunity cost or marginal rate of transformationproductive efficiency, and scarcity of resources the fundamental economic problem that all societies face. This tradeoff is usually considered for an economy, but also applies to each individual, household, and economic organization.
One good can only be produced by diverting resources from other goods, and so by producing less of them. Graphically bounding the production set for fixed input quantities, the PPF curve shows the maximum possible production level of one commodity for any given production level of the other, given the existing state of technology.PPF/PPC (Production Possibility Frontiers/Curves)
By doing so, it defines productive efficiency in the context of that production set: a point on the frontier indicates efficient use of the available inputs such as points B, D and C in the grapha point beneath the curve such as A indicates inefficiency, and a point beyond the curve such as X indicates impossibility.
PPFs are normally drawn as bulging upwards or outwards from the origin "concave" when viewed from the originbut they can be represented as bulging downward inwards or linear straightdepending on a number of assumptions. An outward shift of the PPC results from growth of the availability of inputs, such as physical capital or labour, or from technological progress in knowledge of how to transform inputs into outputs.
Such a shift reflects, for instance, economic growth of an economy already operating at its full productivity on the PPFwhich means that more of both outputs can now be produced during the specified period of time without sacrificing the output of either good.
Conversely, the PPF will shift inward if the labour force shrinks, the supply of raw materials is depleted, or a natural disaster decreases the stock of physical capital. However, most economic contractions reflect not that less can be produced but that the economy has started operating below the frontier, as typically, both labour and physical capital are underemployed, remaining therefore idle.
In microeconomicsthe PPF shows the options open to an individual, householdor firm in a two good world. By definition, each point on the curve is productively efficient, but, given the nature of market demandsome points will be more profitable than others. Equilibrium for a firm will be the combination of outputs on the PPF that is most profitable. From a macroeconomic perspective, the PPF illustrates the production possibilities available to a nation or economy during a given period of time for broad categories of output.
It is traditionally used to show the movement between committing all funds to consumption on the y -axis versus investment on the x -axis. However, an economy may achieve productive efficiency without necessarily being allocatively efficient. Market failure such as imperfect competition or externalities and some institutions of social decision-making such as government and tradition may lead to the wrong combination of goods being produced hence the wrong mix of resources being allocated between producing the two goods compared to what consumers would prefer, given what is feasible on the PPF.
The two main determinants of the position of the PPF at any given time are the state of technology and management expertise which are reflected in the available production functions and the available quantities of factors of production materials, direct labor, and factory overhead.
Only points on or within a PPF are actually possible to achieve in the short run. In the long run, if technology improves or if the supply of factors of production increases, the economy's capacity to produce both goods increases; if this potential is realized, economic growth occurs. That increase is shown by a shift of the production-possibility frontier to the right. Conversely, a natural, military or ecological disaster might move the PPF to the left in response to a reduction in an economy's productive capability.
If the two production goods depicted are capital investment to increase future production possibilities and current consumption goods, the higher the investment this year, the more the PPF would shift out in following years. Similarly, if one good makes more use of say capital and if capital grows faster than other factors, growth possibilities might be biased in favor of the capital-intensive good. Specifically, at all points on the frontier, the economy achieves productive efficiency : no more output of any good can be achieved from the given inputs without sacrificing output of some good.
Some productive efficient points are Pareto efficient : impossible to find any trade that will make no consumer worse off. Similarly, not all Pareto efficient points on the frontier are Allocative efficient.
Allocative efficient is only achieved when the economy produces at quantities that match societal preference. A PPF typically takes the form of the curve illustrated above. An economy that is operating on the PPF is said to be efficientmeaning that it would be impossible to produce more of one good without decreasing production of the other good.
In contrast, if the economy is operating below the curve, it is said to be operating inefficiently because it could reallocate resources in order to produce more of both goods or some resources such as labor or capital are sitting idle and could be fully employed to produce more of both goods.
For example, if one assumes that the economy's available quantities of factors of production do not change over time and that technological progress does not occur, if the economy is operating on the PPF, production of guns would need to be sacrificed to produce more butter. In the PPF, all points on the curve are points of maximum productive efficiency no more output of any good can be achieved from the given inputs without sacrificing output of some good ; all points inside the frontier such as A can be produced but are productively inefficient ; all points outside the curve such as X cannot be produced with the given, existing resources.
Any point that lies either on the production possibilities curve or to the left of it is said to be an attainable point : it can be produced with currently available resources.In this case, the society get more benefit from the production of butter but the government go with the production of gun, not based on the interest of the population, it is a clear case of market failure.
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Operations Management. Chemical Engineering. Civil Engineering. Computer Engineering. Computer Science. Electrical Engineering. Mechanical Engineering. Advanced Math. Advanced Physics. Earth Science. Social Science. Put two points, A and B, on the curve.In business analysis, the production possibility frontier PPF is a curve that illustrates the variations in the amounts that can be produced of two products if both depend upon the same finite resource for their manufacture.
PPF also plays a crucial role in economics. It can be used to demonstrate the point that any nation's economy reaches its greatest level of efficiency when it produces only what it is best qualified to produce and trades with other nations for the rest of what it needs. The PPF is also referred to as the production possibility curve or the transformation curve. That is, there are just enough apple orchards producing apples, just enough car factories making cars, and just enough accountants offering tax services.
If the economy is producing more or less of the quantities indicated by the PPF, resources are being managed inefficiently and the nation's economic stability will deteriorate. The production possibility frontier demonstrates that there are, or should be, limits on production.
An economy, to achieve efficiency, must decide what combination of goods and services can and should be produced.
Production Possibility Frontier
In business analysis, the PPF operates under the assumption that the production of one commodity can only increase if the production of the other commodity decreases, due to limited available resources.
Thus, PPF measures the efficiency with which two commodities can be produced simultaneously. This data is of importance to managers seeking to determine the precise mix of goods that most benefits a company's bottom line. The PPF assumes that technological infrastructure is constant, and underlines the notion that opportunity costs typically arise when an economic organization with limited resources must decide between two products. However, the PPF curve does not apply to companies that produce three or more products vying for the same resource.
The PPF is graphically depicted as an arc, with one commodity represented on the X-axis and the other represented on the Y-axis. Each point on the arc shows the most efficient number of the two commodities that can be produced with available resources. Economists use PPFs to demonstrate that an efficient nation produces what it is most capable of producing and trades with other nations for the rest.
For example, if a non-profit agency provides a mix of textbooks and computers, the PPF may show that it can produce either 40 textbooks and seven computers, or 70 textbooks and three computers. The agency's leadership must determine which item is more urgently needed. In this example, the opportunity cost of producing an additional 30 textbooks equals four computers. For another example, consider the chart below.
Imagine a national economy that can produce only two things: wine and cotton. For instance, producing five units of wine and five units of cotton point B is just as desirable as producing three units of wine and seven units of cotton. Point X represents an inefficient use of resources, while point Y represents a goal that the economy simply cannot attain with its present levels of resources.
As we can see, in order for this economy to produce more wine, it must give up some of the resources it is currently using to produce cotton point A. If the economy starts producing more cotton represented by points B and Cit would need to divert resources from making wine and, consequently, it will produce less wine than it is producing at point A.
Moreover, by moving production from point A to B, the economy must decrease wine production by a small amount in comparison to the increase in cotton output. But if the economy moves from point B to C, wine output will be significantly reduced while the increase in cotton will be quite small. Keep in mind that A, B, and C all represent the most efficient allocation of resources for the economy. The nation must decide how to achieve the PPF and which combination to use. If more wine is in demand, the cost of increasing its output is proportional to the cost of decreasing cotton production.
Markets play an important role in telling the economy what the PPF ought to look like.Hi, thank you for the question. As per the guidelines, we can only answer 1 question at a time.
Kindly post the other question separately to get it answered. The production possibility curve refers to the different combinations of two commodities that can be produced using the available resources and technologies fully and efficiently.
Figure 1 shows the production possibility curve of two goods. Point 1 lie inside the production possibility curve and represents the ineffic Questions are typically answered within 1 hour. Q: Indicate whether the statement is true or false, and justify your answer. A: Aging population increase in Japan is faster than other industrialized developed nations.
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It only incorpor Subscribe Sign in. Operations Management. Chemical Engineering. Civil Engineering. Computer Engineering. Computer Science. Electrical Engineering. Mechanical Engineering.
Advanced Math. Advanced Physics. Earth Science. Social Science. Graph 1: Draw a production possibilities model with 4 points labelled A, B, C, D, one inside, two on, and one outside the production possibilities curve. Explain the 4 points in terms of scarcity, choice and efficiency. Asked Jun 25, If you're seeing this message, it means we're having trouble loading external resources on our website.
Production Possibility Frontier (PPF)
Lesson summary: Opportunity cost and the PPC. Practice: Opportunity cost and the PPC. Next lesson. Current timeTotal duration Google Classroom Facebook Twitter. Video transcript Let's say you're some type of a hunter gatherer and you're trying to figure out how much of your time to spend hunting and how much of your time to spend gathering.
So let's think about the different scenarios here and the tradeoffs that they involve. And just for simplicity we're going to assume that when you're talking about hunting, the only animal around you to hunt for are these little rabbits.
And when we're talking about gathering, the only thing you can gather are some type of berries. That'll keep our conversation a little bit simpler. So let's think about all of the scenarios. So first, let's call this first scenario Scenario A. And let's say-- so let's call this the number of rabbits you can get and then let's call this the number of berries. Let's do this column as the number of berries that you can get. So if you were to spend your entire day going after rabbits, all your free time out-- making sure you have time to sleep, and get dressed, and all those type of things.
Let's say that you can actually get five rabbits, on average, in a given day. But if you spend all your time getting rabbits you're not going to have any time to get berries. So you're going to be able to get 0 berries.A production possibility frontier PPF shows the maximum possible output combinations of two goods or services an economy can achieve when all resources are fully and efficiently employed.
A production possibility frontier is used to illustrate the concepts of opportunity cost, trade-offs and also show the effects of economic growth. Combinations of the output of consumer and capital goods lying inside the PPF happen when there are unemployed resources or when resources are used inefficiently.
We could increase total output by moving towards the PPF. A country would require an increase in factor resourcesan increase in the productivity or an improvement in technology to reach this combination. Producing more of both goods would represent an improvement in welfare and a gain in what is called allocative efficiency. Join s of fellow Economics teachers and students all getting the tutor2u Economics team's latest resources and support delivered fresh in their inbox every morning.
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Cart Account Log in Sign up. Economics Explore Economics Search Go. Economics Reference library. Opportunity Cost and the PPF Reallocating scarce resources from one product to another involves an opportunity cost If we increase our output of consumer goods i. We normally draw a PPF on a diagram as concave to the origin i. PPF and Economic Efficiency Production Possibilities A production possibility frontier is used to illustrate the concepts of opportunity cost, trade-offs and also show the effects of economic growth.
We could increase total output by moving towards the PPF Combinations that lie beyond the PPF are unattainable at the moment A country would require an increase in factor resourcesan increase in the productivity or an improvement in technology to reach this combination.
Trade between countries allows nations to consume beyond their own PPF. Subscribe to email updates from tutor2u Economics Join s of fellow Economics teachers and students all getting the tutor2u Economics team's latest resources and support delivered fresh in their inbox every morning. You're now subscribed to receive email updates! Print page. You might also like.
Advantages and Disadvantages of Monopoly Power Student videos. Explaining Natural Monopoly Study notes. Nature of Economics - Introductory Concepts Study notes. From the Blog. The Economics Balloon Debate - a starter activity for an introductory Economics class 3rd September A production possibilities curve is a graphical representation of the alternative combinations of goods and services an economy can produce. It illustrates the production possibilities model.
In drawing the production possibilities curve, we shall assume that the economy can produce only two goods and that the quantities of factors of production and the technology available to the economy are fixed.
To construct a production possibilities curve, we will begin with the case of a hypothetical firm, Alpine Sports, Inc. Christie Ryder began the business 15 years ago with a single ski production facility near Killington ski resort in central Vermont.
Ski sales grew, and she also saw demand for snowboards rising—particularly after snowboard competition events were included in the Winter Olympics in Salt Lake City.
She added a second plant in a nearby town. The second plant, while smaller than the first, was designed to produce snowboards as well as skis. She also modified the first plant so that it could produce both snowboards and skis. Two years later she added a third plant in another town. While even smaller than the second plant, the third was primarily designed for snowboard production but could also produce skis. We can think of each of Ms. We assume that the factors of production and technology available to each of the plants operated by Alpine Sports are unchanged.
Suppose the first plant, Plant 1, can produce pairs of skis per month when it produces only skis. When devoted solely to snowboards, it produces snowboards per month. It can produce skis and snowboards simultaneously as well. The table in Figure 2. These values are plotted in a production possibilities curve for Plant 1. The curve is a downward-sloping straight line, indicating that there is a linear, negative relationship between the production of the two goods.
Neither skis nor snowboards is an independent or a dependent variable in the production possibilities model; we can assign either one to the vertical or to the horizontal axis. Here, we have placed the number of pairs of skis produced per month on the vertical axis and the number of snowboards produced per month on the horizontal axis.
Producing more snowboards requires shifting resources out of ski production and thus producing fewer skis. Producing more skis requires shifting resources out of snowboard production and thus producing fewer snowboards.
Because the production possibilities curve for Plant 1 is linear, we can compute the slope between any two points on the curve and get the same result.