Introducing Production Possibility Frontier(PPF) - EconomicSea

What is Production Possibility Frontier (PPF)?

A tool that explains the opportunity cost, is the production possibility frontier (PPF). The PPF curve represents the points at which an economy produces goods and services most efficiently and, therefore, best allocates its resources. It shows the optimal levels of production of two commodities.

The Production Possibility Frontier shows that the production of one commodity can increase only when the production of another commodity decreases.

It also shows that there are limits to production, therefore, if the economy wants to achieve efficiency, it has to be decided what combination of goods and services can be produced.

If the economy is not producing on PPF, it means that resources are being managed inefficiently.

Graphical Representation Of Production Possibility Frontier

Let us explain with the chart given below. Suppose an economy is producing only two commodities, Rice and Cotton. According to the PPF, the numbers A, B, and C (appearing on the curve) represent the most efficient use of resources by the economy. Point X represents an inefficient use of resources and point Y represents the goal that the economy cannot achieve with its current level of resources.

As we can see from the above graph, in order to produce more rice the economy would have to give up some of the resources it used to produce cotton (point A).

As the economy begins to produce more cotton (represented by points B and C), it will have to divert resources from producing rice and, as a result, it will produce less rice than it produces at point A.

Therefore, by moving production from A to B, the economy should reduce the production of rice by a small amount compared to the increase in cotton. But, if the economy moves from point B to C, the production of rice will drop significantly while the increase in cotton production will be much less.

Any point on the PPF, such as A, B, and C, is said to be efficient and indicates that the economy's scarce resources are being fully employed. This is also called Pareto Efficiency(will discuss in detail in another blog). Point X (which is inside the PPF) means that the country's resources are said to be inefficient, or in other words, the country is not able to produce enough rice or cotton given the potential of its resources. Point Y (which is outside the PPF) represents an output level that is currently inaccessible by this economy. But it may be an objective for the future.