A production possibility frontier (PPF) shows the maximum combinations of output of two different goods that can be produced when all resources are fully employed.
PPF Diagram
For example, assume the economy can only produce two goods: planes and cars. The diagram shows the PPF for planes and cars. The horizontal axis shows the number of cars and the vertical axis shows the number of planes.
For example the economy could produce 100 planes but no cars. Alternatively the economy could produce 100 cars but no planes. The economy could also produce a combination between these two extremes for example 70 cars and 70 planes. The PPF shows the combinations that make full use of the inputs.
Features of the PPF
There are tradeoffs. If the economy is on the PPF, then to produce more cars, it must produce fewer planes. The economy would have to reallocate workers from the plane sector to the car sector. For example if the economy is at point A and wants to produce 20 more cars, it must produce 20 fewer planes. This is the opportunity cost of having 20 more cars.
The PPF is usually drawn curved. This shows that as the number of cars produced increases, the opportunity cost of an extra car also increases. In other words the economy has to give up even more planes, every time car production increases by 1 extra car. As you add more workers to the car factory, it becomes more difficult to increase production.
Points inside the PPF, such as point C, show the unemployment of economic resources. For example at point C there may be unused capital or labour.
Economic Growth
A shift outwards of the PPF shows economic growth as in the diagram below. This could occur because there are more factors of production (for example increasing immigration) or higher productivity (better use of existing factors of production).
What if firms “get better” at producing one good but not the other? For example what if the productivity in cars rises but productivity in plane production remains the same? In this case the PPF rotates. If the economy put all its resources into planes, it would still get the same level of production of 100 planes. But if instead all resources went to cars, there would be a greater level of production now than the original 100 cars.
Productive vs Allocative Efficiency
All points on the PPF are ‘productively efficient’. The economy is producing the maximum output possible given the available inputs.
Not all points on the boundary are ‘allocatively efficient’. If consumers mostly prefer cars to planes, then producing mostly planes will not maximise the total welfare of the consumers and producers.
To read more about allocative efficiency in the case of healthcare, see the article here.
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