Economics / Unit 1: Scarcity, Choices and Opportunity Cost
1.4 The Production Possibilities Frontier
Notes
A production possibilities frontier (PPF) shows the maximum combinations of two goods an economy can make when it uses all its resources and technology fully. Drawn as a graph, it is usually a curve that bows outward from the origin.
- Points on the curve are efficient. Points inside the curve are inefficient (resources are unused, as in a recession). Points outside the curve are unattainable with current resources.
- Moving along the curve shows opportunity cost: making more of one good means making less of the other.
- Law of increasing opportunity cost: resources are not equally suited to both goods, so each extra unit of one good costs more and more of the other. This is why the curve bows outward.
- Economic growth (more resources, better technology, more human capital) shifts the whole curve outward. A war or disaster that destroys resources shifts it inward.
| Point | Wheat (tons) | Cars |
|---|---|---|
| A | 0 | 50 |
| B | 40 | 45 |
| C | 70 | 35 |
| D | 90 | 20 |
| E | 100 | 0 |
- Worked example: from B to C, wheat rises by 30 tons and cars fall by 10, so each ton costs $\displaystyle \frac{10}{30} = \frac{1}{3}$ car. From C to D, 20 more tons cost 15 cars, or $\displaystyle \frac{15}{20} = 0.75$ car per ton. The cost per ton rises.
Practice
An economy can produce 90 tons of wheat and 20 cars (point D) or 100 tons of wheat and 0 cars (point E). What is the opportunity cost of moving from D to E?
To gain 10 tons of wheat the economy gives up all 20 cars.
An economy is producing at a point inside its PPF. This means:
Inside the curve, the economy could make more of both goods with the resources it already has.
A new technology makes both farming and car production faster. On a PPF of wheat and cars, this would:
Better technology lets the economy produce more of both goods, which is economic growth.
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