Production Possibility Frontier

Production Possibility Frontier

Let's begin with a simple concept from macro economics called the Production Possibility Frontier. The Production Possibility Frontier shows the maximum amount of any two products that an economy can produce. Yes, real life economies produce more than just two products; however, the the PPF example uses only two products for the sake of simplicity.

In the example below, the economy can either produce only cell phones, only computers, or some combination of the two.

The points located on the curve (A,B,C,D,E) are called Efficient Production Points. At efficient production points the economy is producing the maximum number of goods possible.

Points that lie underneath the PPF curve, such as point F, are called inefficient production points. This means the economy is not using its resources and technology to its fullest; there for, it is not producing the most goods possible.

Point D on the other hand is impossible. The economy currently does not have the resources and/or technology to produce at this level.

If the technology and/or resources increase in the economy, the PPF curve shifts outward.

 Along with illustrating efficient production points, the PPF is also a good example of Opportunity Cost. Opportunity cost is the benefit of an action one gives up by taking another course of action. In our PPF example the opportunity cost of producing more computers would be the lower production of cell phones. A page fully devoted to opportunity cost will come very shorty.

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