Production Possibility Frontier

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    A Production Possibility Frontier (PPF) shows all the different combination of goods an economy can produce if all resources are fully and efficiently employed. The PPF shows the productive capacity of the economy (how much the economy can produce).

    At point A, resources are not fully employed and/or are not being used efficiently. At point B, all resources are fully employed and are being used efficiently. Point C is not attainable given current resources and technology.

    Movement Along the PPF A movement along the PPF shows the opportunity cost of production.

    A movement along the PPF from A to B shows an opportunity cost. To increase the production of good X from 20 to 70 units, the production of 40 (100-60) units of good Y must be foregone. At point A, 40 units of good Y is the opportunity cost of producing 50 more units of good X.

    Movement Along A Linear PPF A linear PPF shows a constant opportunity cost of production.

    A movement along the PPF from A to B to C shows a constant opportunity cost. To increase the production of good X by 40 units from 40 to 80 units, the production of 20 (120-100) units of good Y must be foregone. To increase the production of good X by 40 units from 80 to 120 units, the production of 20 (100-80) units of good Y must be foregone. So the opportunity cost is the same all along the PPF.

    Movement of the PPF A movement of the PPF shows a change in the efficiency of production and/or the discovery (or destruction) of resources. The maximum level of output of goods X and Y changes due to a change in the quality and/or quantity of resources.

    Below, the PPF has shifted outwards from PPF1 to PPF2 and the maximum output of X and Y has increased from X1 to X2 and Y1 to Y2 respectively.

    Maybe technology or the quality of the workforce (education and skills) improves so the economy becomes more productive. As the quality of resources rise, the maximum level of output rises.

    Maybe new raw materials or minerals (oil) were discovered causing the quantity of resources to increase. As the quantity of resources increase, more can be produced so the maximum level of output rises.

    A leftward shift of the PPF could be caused by a war or natural disaster. Wars and natural disasters destroy resources and the infrastructure so the quantity and quality of resources falls, less can be produced so the maximum level of output falls.

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