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I chose this site because I found that it went over some of the smaller details that other sites were glossing over. The most interesting thing that I found was Pareto efficiency, others had mentioned it, but this site went into much more detail on it.

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What Is the Production Possibility Frontier (PPF)?

In business analysis, the production possibility frontier (PPF) is a curve that illustrates the variations in the amounts that can be produced of two products if both depend upon the same finite resource for their manufacture.

PPF also plays a crucial role in economics. It can be used to demonstrate the point that any nation's economy reaches its greatest level of efficiency when it produces only what it is best qualified to produce and trades with other nations for the rest of what it needs.

The PPF is also referred to as the production possibility curve or the transformation curve.

Understanding the PPF

In macroeconomics, the PPF is the point at which a country's economy is most efficiently producing its various goods and services and, therefore, allocating its resources in the best way possible.

That is, there are just enough apple orchards producing apples, just enough car factories making cars, and just enough accountants offering tax services.

If the economy is producing more or less of the quantities indicated by the PPF, resources are being managed inefficiently and the nation's economic stability will deteriorate.

The production possibility frontier demonstrates that there are, or should be, limits on production. An economy, to achieve efficiency, must decide what combination of goods and services can and should be produced.

The Business View

In business analysis, the PPF operates under the assumption that the production of one commodity can only increase if the production of the other commodity decreases, due to limited available resources. Thus, PPF measures the efficiency with which two commodities can be produced simultaneously.

This data is of importance to managers seeking to determine the precise mix of goods that most benefits a company's bottom line.

The PPF assumes that technological infrastructure is constant, and underlines the notion that opportunity costs typically arise when an economic organization with limited resources must decide between two products.

However, the PPF curve does not apply to companies that produce three or more products vying for the same resource.

Interpreting the PPF

The PPF is graphically depicted as an arc, with one commodity represented on the X-axis and the other represented on the Y-axis. Each point on the arc shows the most efficient number of the two commodities that can be produced with available resources.

For example, if a non-profit agency provides a mix of textbooks and computers, the PPF may show that it can produce either 40 textbooks and seven computers, or 70 textbooks and three computers. The agency's leadership must determine which item is more urgently needed. In this example, the opportunity cost of producing an additional 30 textbooks equals four computers.

PPF on a National Scale

For another example, consider the chart below. Imagine a national economy that can produce only two things: wine and cotton. According to the PPF, points A, B, and C on the PPF curve represent the most efficient use of resources by the economy.

For instance, producing five units of wine and five units of cotton (point B) is just as desirable as producing three units of wine and seven units of cotton. Point X represents an inefficient use of resources, while point Y represents a goal that the economy simply cannot attain with its present levels of resources.

As we can see, in order for this economy to produce more wine, it must give up some of the resources it is currently using to produce cotton (point A). If the economy starts producing more cotton (represented by points B and C), it would need to divert resources from making wine and, consequently, it will produce less wine than it is producing at point A.

Moreover, by moving production from point A to B, the economy must decrease wine production by a small amount in comparison to the increase in cotton output. But if the economy moves from point B to C, wine output will be significantly reduced while the increase in cotton will be quite small.

Keep in mind that A, B, and C all represent the most efficient allocation of resources for the economy. The nation must decide how to achieve the PPF and which combination to use. If more wine is in demand, the cost of increasing its output is proportional to the cost of decreasing cotton production. Markets play an important role in telling the economy what the PPF ought to look like.

Consider point X on the figure above. Being at point X means that the country's resources are not being used efficiently or, more specifically, that the country is not producing enough cotton or wine given the potential of its resources. On the other hand, point Y, as we mentioned above, represents an output level that is currently unattainable by this economy.

If there were an improvement in technology while the level of land, labor, and capital remained the same, the time required to pick cotton and grapes would be reduced.

Output would increase, and the PPF would be pushed outwards. A new curve, represented in the figure below on which Y would fall, would show the new efficient allocation of resources.

When the PPF shifts outwards, it implies growth in an economy. When it shifts inwards, it indicates that the economy is shrinking due to a failure in its allocation of resources and optimal production capability.

A shrinking economy could be a result of a decrease in supplies or a deficiency in technology.

An economy can only be produced on the PPF curve in theory. In reality, economies constantly struggle to reach an optimal production capacity. And because scarcity forces an economy to forgo some choice in favor of others, the slope of the PPF will always be negative. That is, if the production of product A increases then the production of product B will have to decrease.

PPF and the Pareto Efficiency

The Pareto Efficiency, a concept named after Italian economist Vilfredo Pareto, measures the efficiency of the commodity allocation on the PPF. The Pareto Efficiency states that any point within the PPF curve is inefficient because the total output of commodities is below the output capacity.

Conversely, any point outside the PPF curve is impossible because it represents a mix of commodities that will require more resources to produce than are currently obtainable.

Therefore, in situations with limited resources, only the efficient commodity mixes are those lying along the PPF curve, with one commodity on the X-axis the other on the Y-axis.

Trade, Comparative Advantage, and Absolute Advantage

An economy may be able to produce for itself all of the goods and services it needs to function using the PPF as a guide. However, this may actually lead to an overall inefficient allocation of resources and hinder future growth when the benefits of trade are considered.

Through specialization, a country can concentrate on the production of just a few things that it can do best, rather than trying to do everything on its own.

Example of PPF

Consider a hypothetical world that has only two countries (Country A and Country B) and only two products (cars and cotton). Each country can make cars and/or cotton. Suppose that Country A has very little fertile land and an abundance of steel. Country B has an abundance of fertile land but very little steel.

If Country A were to try to produce both cars and cotton, it would need to split its resources and put a great deal of effort into irrigating its land to grow cotton. That would mean it can produce fewer cars, which it is much more capable of doing. The opportunity cost of producing both cars and cotton is high for Country A. Similarly, for Country B, the opportunity cost of producing both products is high because of the effort required to produce cars given its lack of steel.

The Comparative Advantage

Each country in our example can produce one of these products more efficiently (at a lower cost) than the other. We can say that Country A has a comparative advantage over Country B in the production of cars, and Country B has a comparative advantage over Country A in the production of cotton.

Or, both countries could decide to specialize in producing the goods for which they have a comparative advantage. Each can trade its specialized product to the other and both countries will be able to enjoy both products at a lower cost. Quality will improve, too, since each country is making what it makes best.

Determining how countries exchange goods produced by comparative advantage ("the best for the best") is the backbone of international trade theory. This method of exchange via trade is considered an optimal allocation of resources. It means that national economies, in theory, will no longer be lacking anything that they need.

Like opportunity cost, specialization and comparative advantage also apply to the way in which individuals interact within an economy. At least in modern times, few people try to produce everything they consume.

The Absolute Advantage

Sometimes a country or an individual can produce more than another country, even though countries both have the same amount of inputs. For example, Country A may have a technological advantage that, with the same amount of inputs (good land, steel, labor), enables the country to easily manufacture more of both cars and cotton than Country B.

A country that can produce more of both goods is said to have an absolute advantage. Better access to natural resources can give a country an absolute advantage, as can higher levels of education, skilled labor, and overall technological advancement.

It is not possible, however, for a country to have an absolute advantage in everything that must be produced. it will always need trade.

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What the Production Possibility Frontier (PPF) Curve Shows

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In business analysis, the production possibility frontier (PPF) is a curve that illustrates the variations in the amounts that can be produced of two products if both depend upon the same finite resource for their manufacture. PPF also plays a crucial role in economics.

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I chose this website because it has questions at the end for if you want to test your knowledge after reading. One thing that I found interesting was the way that they explained it using more than just good vs good, they also compared producing good to other necessities such as security.

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Learning Objectives

1. Explain the concept of the production possibilities curve and understand the implications of its downward slope and bowed-out shape.

2. Use the production possibilities model to distinguish between full employment and situations of idle factors of production and between efficient and inefficient production.

3. Understand specialization and its relationship to the production possibilities model and comparative advantage.

An economy's factors of production are scarce; they cannot produce an unlimited quantity of goods and services. A production possibilities curve is a graphical representation of the alternative combinations of goods and services an economy can produce. It illustrates the production possibilities model. In drawing the production possibilities curve, we shall assume that the economy can produce only two goods and that the quantities of factors of production and the technology available to the economy are fixed.

Constructing a Production Possibilities Curve

To construct a production possibilities curve, we will begin with the case of a hypothetical firm, Alpine Sports, Inc., a specialized sports equipment manufacturer. Christie Ryder began the business 15 years ago with a single ski production facility near Killington ski resort in central Vermont. Ski sales grew, and she also saw demand for snowboards rising-particularly after snowboard competition events were included in the 2002 Winter Olympics in Salt Lake City. She added a second plant in a nearby town. The second plant, while smaller than the first, was designed to produce snowboards as well as skis. She also modified the first plant so that it could produce both snowboards and skis. Two years later she added a third plant in another town. While even smaller than the second plant, the third was primarily designed for snowboard production but could also produce skis.

We can think of each of Ms. Ryder's three plants as a miniature economy and analyze them using the production possibilities model. We assume that the factors of production and technology available to each of the plants operated by Alpine Sports are unchanged.

Suppose the first plant, Plant 1, can produce 200 pairs of skis per month when it produces only skis. When devoted solely to snowboards, it produces 100 snowboards per month. It can produce skis and snowboards simultaneously as well.

The table in Figure 2.2 "A Production Possibilities Curve" gives three combinations of skis and snowboards that Plant 1 can produce each month. Combination A involves devoting the plant entirely to ski production; combination C means shifting all of the plant's resources to snowboard production; combination B involves the production of both goods. These values are plotted in a production possibilities curve for Plant 1. The curve is a downward-sloping straight line, indicating that there is a linear, negative relationship between the production of the two goods.

Neither skis nor snowboards is an independent or a dependent variable in the production possibilities model; we can assign either one to the vertical or to the horizontal axis. Here, we have placed the number of pairs of skis produced per month on the vertical axis and the number of snowboards produced per month on the horizontal axis.

The negative slope of the production possibilities curve reflects the scarcity of the plant's capital and labor. Producing more snowboards requires shifting resources out of ski production and thus producing fewer skis. Producing more skis requires shifting resources out of snowboard production and thus producing fewer snowboards.

The slope of Plant 1's production possibilities curve measures the rate at which Alpine Sports must give up ski production to produce additional snowboards. Because the production possibilities curve for Plant 1 is linear, we can compute the slope between any two points on the curve and get the same result. Between points A and B, for example, the slope equals −2 pairs of skis/snowboard (equals −100 pairs of skis/50 snowboards). (Many students are helped when told to read this result as "−2 pairs of skis per snowboard.") We get the same value between points B and C, and between points A and C.

To see this relationship more clearly, examine Figure 2.3 "The Slope of a Production Possibilities Curve". Suppose Plant 1 is producing 100 pairs of skis and 50 snowboards per month at point B. Now consider what would happen if Ms. Ryder decided to produce 1 more snowboard per month. The segment of the curve around point B is magnified in Figure 2.3 "The Slope of a Production Possibilities Curve". The slope between points B and B′ is −2 pairs of skis/snowboard. Producing 1 additional snowboard at point B′ requires giving up 2 pairs of skis. We can think of this as the opportunity cost of producing an additional snowboard at Plant 1. This opportunity cost equals the absolute value of the slope of the production possibilities curve.

The slope of the linear production possibilities curve in Figure 2.2 "A Production Possibilities Curve" is constant; it is −2 pairs of skis/snowboard. In the section of the curve shown here, the slope can be calculated between points B and B′. Expanding snowboard production to 51 snowboards per month from 50 snowboards per month requires a reduction in ski production to 98 pairs of skis per month from 100 pairs. The slope equals −2 pairs of skis/snowboard (that is, it must give up two pairs of skis to free up the resources necessary to produce one additional snowboard). To shift from B′ to B″, Alpine Sports must give up two more pairs of skis per snowboard. The absolute value of the slope of a production possibilities curve measures the opportunity cost of an additional unit of the good on the horizontal axis measured in terms of the quantity of the good on the vertical axis that must be forgone.

The absolute value of the slope of any production possibilities curve equals the opportunity cost of an additional unit of the good on the horizontal axis. It is the amount of the good on the vertical axis that must be given up in order to free up the resources required to produce one more unit of the good on the horizontal axis. We will make use of this important fact as we continue our investigation of the production possibilities curve.

Figure 2.4 "Production Possibilities at Three Plants" shows production possibilities curves for each of the firm's three plants. Each of the plants, if devoted entirely to snowboards, could produce 100 snowboards. Plants 2 and 3, if devoted exclusively to ski production, can produce 100 and 50 pairs of skis per month, respectively. The exhibit gives the slopes of the production possibilities curves for each plant. The opportunity cost of an additional snowboard at each plant equals the absolute values of these slopes (that is, the number of pairs of skis that must be given up per snowboard).

The exhibit gives the slopes of the production possibilities curves for each of the firm's three plants. The opportunity cost of an additional snowboard at each plant equals the absolute values of these slopes. More generally, the absolute value of the slope of any production possibilities curve at any point gives the opportunity cost of an additional unit of the good on the horizontal axis, measured in terms of the number of units of the good on the vertical axis that must be forgone.

The greater the absolute value of the slope of the production possibilities curve, the greater the opportunity cost will be. The plant for which the opportunity cost of an additional snowboard is greatest is the plant with the steepest production possibilities curve; the plant for which the opportunity cost is lowest is the plant with the flattest production possibilities curve. The plant with the lowest opportunity cost of producing snowboards is Plant 3; its slope of −0.5 means that Ms. Ryder must give up half a pair of skis in that plant to produce an additional snowboard. In Plant 2, she must give up one pair of skis to gain one more snowboard. We have already seen that an additional snowboard requires giving up two pairs of skis in Plant 1.

Comparative Advantage and the Production Possibilities Curve

To construct a combined production possibilities curve for all three plants, we can begin by asking how many pairs of skis Alpine Sports could produce if it were producing only skis. To find this quantity, we add up the values at the vertical intercepts of each of the production possibilities curves in Figure 2.4 "Production Possibilities at Three Plants". These intercepts tell us the maximum number of pairs of skis each plant can produce. Plant 1 can produce 200 pairs of skis per month, Plant 2 can produce 100 pairs of skis at per month, and Plant 3 can produce 50 pairs. Alpine Sports can thus produce 350 pairs of skis per month if it devotes its resources exclusively to ski production. In that case, it produces no snowboards.

Now suppose the firm decides to produce 100 snowboards. That will require shifting one of its plants out of ski production. Which one will it choose to shift? The sensible thing for it to do is to choose the plant in which snowboards have the lowest opportunity cost-Plant 3. It has an advantage not because it can produce more snowboards than the other plants (all the plants in this example are capable of producing up to 100 snowboards per month) but because it is the least productive plant for making skis. Producing a snowboard in Plant 3 requires giving up just half a pair of skis.

Economists say that an economy has a comparative advantage in producing a good or service if the opportunity cost of producing that good or service is lower for that economy than for any other. Plant 3 has a comparative advantage in snowboard production because it is the plant for which the opportunity cost of additional snowboards is lowest. To put this in terms of the production possibilities curve, Plant 3 has a comparative advantage in snowboard production (the good on the horizontal axis) because its production possibilities curve is the flattest of the three curves.

Plant 3's comparative advantage in snowboard production makes a crucial point about the nature of comparative advantage. It need not imply that a particular plant is especially good at an activity. In our example, all three plants are equally good at snowboard production. Plant 3, though, is the least efficient of the three in ski production. Alpine thus gives up fewer skis when it produces snowboards in Plant 3. Comparative advantage thus can stem from a lack of efficiency in the production of an alternative good rather than a special proficiency in the production of the first good.

The combined production possibilities curve for the firm's three plants is shown in Figure 2.5 "The Combined Production Possibilities Curve for Alpine Sports". We begin at point A, with all three plants producing only skis. Production totals 350 pairs of skis per month and zero snowboards. If the firm were to produce 100 snowboards at Plant 3, ski production would fall by 50 pairs per month (recall that the opportunity cost per snowboard at Plant 3 is half a pair of skis). That would bring ski production to 300 pairs, at point B. If Alpine Sports were to produce still more snowboards in a single month, it would shift production to Plant 2, the facility with the next-lowest opportunity cost. Producing 100 snowboards at Plant 2 would leave Alpine Sports producing 200 snowboards and 200 pairs of skis per month, at point C. If the firm were to switch entirely to snowboard production, Plant 1 would be the last to switch because the cost of each snowboard there is 2 pairs of skis. With all three plants producing only snowboards, the firm is at point D on the combined production possibilities curve, producing 300 snowboards per month and no skis.

Notice that this production possibilities curve, which is made up of linear segments from each assembly plant, has a bowed-out shape; the absolute value of its slope increases as Alpine Sports produces more and more snowboards. This is a result of transferring resources from the production of one good to another according to comparative advantage. We shall examine the significance of the bowed-out shape of the curve in the next section.

The Law of Increasing Opportunity Cost

We see in Figure 2.5 "The Combined Production Possibilities Curve for Alpine Sports" that, beginning at point A and producing only skis, Alpine Sports experiences higher and higher opportunity costs as it produces more snowboards. The fact that the opportunity cost of additional snowboards increases as the firm produces more of them is a reflection of an important economic law. The law of increasing opportunity cost holds that as an economy moves along its production possibilities curve in the direction of producing more of a particular good, the opportunity cost of additional units of that good will increase.

We have seen the law of increasing opportunity cost at work traveling from point A toward point D on the production possibilities curve in Figure 2.5 "The Combined Production Possibilities Curve for Alpine Sports". The opportunity cost of each of the first 100 snowboards equals half a pair of skis; each of the next 100 snowboards has an opportunity cost of 1 pair of skis, and each of the last 100 snowboards has an opportunity cost of 2 pairs of skis. The law also applies as the firm shifts from snowboards to skis. Suppose it begins at point D, producing 300 snowboards per month and no skis. It can shift to ski production at a relatively low cost at first. The opportunity cost of the first 200 pairs of skis is just 100 snowboards at Plant 1, a movement from point D to point C, or 0.5 snowboards per pair of skis. We would say that Plant 1 has a comparative advantage in ski production. The next 100 pairs of skis would be produced at Plant 2, where snowboard production would fall by 100 snowboards per month. The opportunity cost of skis at Plant 2 is 1 snowboard per pair of skis. Plant 3 would be the last plant converted to ski production. There, 50 pairs of skis could be produced per month at a cost of 100 snowboards, or an opportunity cost of 2 snowboards per pair of skis.

The bowed-out production possibilities curve for Alpine Sports illustrates the law of increasing opportunity cost. Scarcity implies that a production possibilities curve is downward sloping; the law of increasing opportunity cost implies that it will be bowed out, or concave, in shape.

The bowed-out curve of Figure 2.5 "The Combined Production Possibilities Curve for Alpine Sports" becomes smoother as we include more production facilities. Suppose Alpine Sports expands to 10 plants, each with a linear production possibilities curve. Panel (a) of Figure 2.6 "Production Possibilities for the Economy" shows the combined curve for the expanded firm, constructed as we did in Figure 2.5 "The Combined Production Possibilities Curve for Alpine Sports". This production possibilities curve includes 10 linear segments and is almost a smooth curve. As we include more and more production units, the curve will become smoother and smoother. In an actual economy, with a tremendous number of firms and workers, it is easy to see that the production possibilities curve will be smooth. We will generally draw production possibilities curves for the economy as smooth, bowed-out curves, like the one in Panel (b). This production possibilities curve shows an economy that produces only skis and snowboards. Notice the curve still has a bowed-out shape; it still has a negative slope. Notice also that this curve has no numbers. Economists often use models such as the production possibilities model with graphs that show the general shapes of curves but that do not include specific numbers.

Movements Along the Production Possibilities Curve

We can use the production possibilities model to examine choices in the production of goods and services. In applying the model, we assume that the economy can produce two goods, and we assume that technology and the factors of production available to the economy remain unchanged. In this section, we shall assume that the economy operates on its production possibilities curve so that an increase in the production of one good in the model implies a reduction in the production of the other.

We shall consider two goods and services: national security and a category we shall call "all other goods and services." This second category includes the entire range of goods and services the economy can produce, aside from national defense and security. Clearly, the transfer of resources to the effort to enhance national security reduces the quantity of other goods and services that can be produced. In the wake of the 9/11 attacks in 2001, nations throughout the world increased their spending for national security. This spending took a variety of forms. One, of course, was increased defense spending. Local and state governments also increased spending in an effort to prevent terrorist attacks. Airports around the world hired additional agents to inspect luggage and passengers.

The increase in resources devoted to security meant fewer "other goods and services" could be produced. In terms of the production possibilities curve in Figure 2.7 "Spending More for Security", the choice to produce more security and less of other goods and services means a movement from A to B. Of course, an economy cannot really produce security; it can only attempt to provide it. The attempt to provide it requires resources; it is in that sense that we shall speak of the economy as "producing" security.

At point A, the economy was producing S A units of security on the vertical axis-defense services and various forms of police protection-and O A units of other goods and services on the horizontal axis. The decision to devote more resources to security and less to other goods and services represents the choice we discussed in the chapter introduction. In this case we have categories of goods rather than specific goods. Thus, the economy chose to increase spending on security in the effort to defeat terrorism. Since we have assumed that the economy has a fixed quantity of available resources, the increased use of resources for security and national defense necessarily reduces the number of resources available for the production of other goods and services.

The law of increasing opportunity cost tells us that, as the economy moves along the production possibilities curve in the direction of more of one good, its opportunity cost will increase. We may conclude that, as the economy moved along this curve in the direction of greater production of security, the opportunity cost of the additional security began to increase. That is because the resources transferred from the production of other goods and services to the production of security had a greater and greater comparative advantage in producing things other than security.

The production possibilities model does not tell us where on the curve a particular economy will operate. Instead, it lays out the possibilities facing the economy. Many countries, for example, chose to move along their respective production possibilities curves to produce more security and national defense and less of all other goods in the wake of 9/11. We will see in the chapter on demand and supply how choices about what to produce are made in the marketplace.

Producing on Versus Producing Inside the Production Possibilities Curve

An economy that is operating inside its production possibilities curve could, by moving onto it, produce more of all the goods and services that people value, such as food, housing, education, medical care, and music. Increasing the availability of these goods would improve the standard of living. Economists conclude that it is better to be on the production possibilities curve than inside it.

Two things could leave an economy operating at a point inside its production possibilities curve. First, the economy might fail to use fully the resources available to it. Second, it might not allocate resources on the basis of comparative advantage. In either case, production within the production possibilities curve implies the economy could improve its performance.

Idle Factors of Production

Suppose an economy fails to put all its factors of production to work. Some workers are without jobs, some buildings are without occupants, some fields are without crops. Because an economy's production possibilities curve assumes the full use of the factors of production available to it, the failure to use some factors results in a level of production that lies inside the production possibilities curve.

If all the factors of production that are available for use under current market conditions are being utilized, the economy has achieved full employment . An economy cannot operate on its production possibilities curve unless it has full employment.

Figure 2.8 "Idle Factors and Production" shows an economy that can produce food and clothing. If it chooses to produce at point A, for example, it can produce F A units of food and C A units of clothing. Now suppose that a large fraction of the economy's workers lose their jobs, so the economy no longer makes full use of one factor of production: labor. In this example, production moves to point B, where the economy produces less food ( F B) and less clothing ( C B) than at point A. We often think of the loss of jobs in terms of the workers; they have lost a chance to work and to earn income. But the production possibilities model points to another loss: goods and services the economy could have produced that are not being produced.

Inefficient Production

Now suppose Alpine Sports is fully employing its factors of production. Could it still operate inside its production possibilities curve? Could an economy that is using all its factors of production still produce less than it could? The answer is "Yes," and the key lies in comparative advantage. An economy achieves a point on its production possibilities curve only if it allocates its factors of production on the basis of comparative advantage. If it fails to do that, it will operate inside the curve.

Suppose that, as before, Alpine Sports has been producing only skis. With all three of its plants producing skis, it can produce 350 pairs of skis per month (and no snowboards). The firm then starts producing snowboards. This time, however, imagine that Alpine Sports switches plants from skis to snowboards in numerical order: Plant 1 first, Plant 2 second, and then Plant 3. Figure 2.9 "Efficient Versus Inefficient Production" illustrates the result. Instead of the bowed-out production possibilities curve ABCD, we get a bowed-in curve, AB′C′D. Suppose that Alpine Sports is producing 100 snowboards and 150 pairs of skis at point B′. Had the firm based its production choices on comparative advantage, it would have switched Plant 3 to snowboards and then Plant 2, so it could have operated at a point such as C. It would be producing more snowboards and more pairs of skis-and using the same quantities of factors of production it was using at B′. Had the firm based its production choices on comparative advantage, it would have switched Plant 3 to snowboards and then Plant 2, so it would have operated at point C. It would be producing more snowboards and more pairs of skis-and using the same quantities of factors of production it was using at B′. When an economy is operating on its production possibilities curve, we say that it is engaging in efficient production . If it is using the same quantities of factors of production but is operating inside its production possibilities curve, it is engaging in inefficient production . Inefficient production implies that the economy could be producing more goods without using any additional labor, capital, or natural resources.

Points on the production possibilities curve thus satisfy two conditions: the economy is making full use of its factors of production, and it is making efficient use of its factors of production. If there are idle or inefficiently allocated factors of production, the economy will operate inside the production possibilities curve. Thus, the production possibilities curve not only shows what can be produced; it provides insight into how goods and services should be produced. It suggests that to obtain efficiency in production, factors of production should be allocated on the basis of comparative advantage. Further, the economy must make full use of its factors of production if it is to produce the goods and services it is capable of producing.

Specialization

The production possibilities model suggests that specialization will occur. Specialization implies that an economy is producing the goods and services in which it has a comparative advantage. If Alpine Sports selects point C in Figure 2.9 "Efficient Versus Inefficient Production", for example, it will assign Plant 1 exclusively to ski production and Plants 2 and 3 exclusively to snowboard production.

Such specialization is typical in an economic system. Workers, for example, specialize in particular fields in which they have a comparative advantage. People work and use the income they earn to buy-perhaps import-goods and services from people who have a comparative advantage in doing other things. The result is a far greater quantity of goods and services than would be available without this specialization.

Think about what life would be like without specialization. Imagine that you are suddenly completely cut off from the rest of the economy. You must produce everything you consume; you obtain nothing from anyone else. Would you be able to consume what you consume now? Clearly not. It is hard to imagine that most of us could even survive in such a setting. The gains we achieve through specialization are enormous.

Nations specialize as well. Much of the land in the United States has a comparative advantage in agricultural production and is devoted to that activity. Hong Kong, with its huge population and tiny endowment of land, allocates virtually none of its land to agricultural use; that option would be too costly. Its land is devoted largely to nonagricultural use.

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Explain the concept of the production possibilities curve and understand the implications of its downward slope and bowed-out shape. Use the production possibilities model to distinguish between full employment and situations of idle factors of production and between efficient and inefficient production. Understand specialization and its relationship to the production possibilities model and comparative advantage.

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I chose this site because even though it is mostly about how to read a production possibilities curve, though it does still go over all of the other aspects of the topic. The most interesting thing that i found was the way that they showed that a curve can grow asymmetrically if one side of the curve has more development than the other

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One of the central principles of economics is that everyone faces tradeoffs because resources are limited. These tradeoffs are present both in individual choice and in the production decisions of entire economies.

The production possibilities frontier (PPF for short, also referred to as production possibilities curve) is a simple way to show these production tradeoffs graphically. Here is a guide to graphing a PPF and how to analyze it.

Label the Axes

Since graphs are two-dimensional, economists make the simplifying assumption that the economy can only produce 2 different goods. Traditionally, economists use guns and butter as the 2 goods when describing an economy's production options, since guns represent a general category of capital goods and butter represents a general category of consumer goods.

The tradeoff in production can then be framed as a choice between capital and consumer goods, which will become relevant later. Therefore, this example will also adopt guns and butter as the axes for the production possibilities frontier. Technically speaking, the units on the axes could be something like pounds of butter and a number of guns.

Plot the Points

The production possibilities frontier is constructed by plotting all of the possible combinations of output that an economy can produce. In this example, let's say the economy can produce:

200 guns if it produces only guns, as represented by the point (0,200)

100 pounds of butter and 190 guns, as represented by the point (100,190)

250 pounds of butter and 150 guns, as represented by the point (250,150)

350 pounds of butter and 75 guns, as represented by the point (350,75)

400 pounds of butter if it produces only butter, as represented by the point (400,0)

The rest of the curve is filled in by plotting all of the remaining possible output combinations.

Inefficient and Infeasible Points

Combinations of output that are inside the production possibilities frontier represent inefficient production. This is when an economy could produce more of both goods (i.e. move up and to the right on the graph) by reorganizing resources.

On the other hand, combinations of output that lie outside the production possibilities frontier represent infeasible points, since the economy doesn't have enough resources to produce those combinations of goods.

Therefore, the production possibilities frontier represents all points where an economy is using all of its resources efficiently.

Opportunity Cost and the Slope of the PPF

Since the production possibilities frontier represents all of the points where all resources are being used efficiently, it must be the case that this economy has to produce fewer guns if it wants to produce more butter, and vice versa. The slope of the production possibilities frontier represents the magnitude of this tradeoff.

For example, in moving from the top left point to the next point down the curve, the economy has to give up production of 10 guns if it wants to produce 100 more pounds of butter. Not coincidentally, the average slope of the PPF over this region is (190-200)/(100-0) = -10/100, or -1/10. Similar calculations can be made between the other labeled points:

In going from the second to the third point, the economy must give up production of 40 guns if it wants to produce another 150 pounds of butter, and the average slope of the PPF between these points is (150-190)/(250-100) = -40/150, or -4/15.

In going from the third to the fourth point, the economy must give up production of 75 guns if it wants to produce another 100 pounds of butter, and the average slope of the PPF between these points is (75-150)/(350-250) = -75/100 = -3/4.

In going from the fourth to the fifth point, the economy must give up production of 75 guns if it wants to produce another 50 pounds of butter, and the average slope of the PPF between these points is (0-75)/(400-350) = -75/50 = -3/2.

Therefore, the magnitude, or absolute value, of the slope of the PPF represents how many guns must be given up in order to produce one more pound of butter between any 2 points on the curve on average.

Economists call this theopportunity cost of butter, given in terms of guns. In general, the magnitude of the PPF's slope represents how many of the things on the y-axis must be forgone in order to produce one more of the thing on the x-axis, or, alternatively, the opportunity cost of the thing on the x-axis.

If you wanted to calculate the opportunity cost of the thing on the y-axis, you could either redraw the PPF with the axes switched or just note that the opportunity cost of the thing on the y-axis is the reciprocal of the opportunity cost of the thing on the x-axis.

Opportunity Cost Increases Along the PPF

You may have noticed that the PPF was drawn such that it is bowed out from the origin. Because of this, the magnitude of the slope of the PPF increases, meaning the slope gets steeper, as we move down and to the right along the curve.

This property implies that the opportunity cost of producing butter increases as the economy produces more butter and fewer guns, which is represented by moving down and to the right on the graph.

Economists believe that, in general, the bowed-out PPF is a reasonable approximation of reality. This is because there are likely to be some resources that are better at producing guns and others that are better at producing butter. If an economy is producing only guns, it has some of the resources that are better at producing butter producing guns instead. To start producing butter and still maintain efficiency, the economy would shift the resources that are best at producing butter (or worst at producing guns) first. Because these resources are better at making butter, they can make a lot of butter instead of just a few guns, which results in a low opportunity cost of butter.

On the other hand, if the economy is producing close to the maximum amount of butter produced, it's already employed all of the resources that are better at producing butter than producing guns. In order to produce more butter, then, the economy has to shift some resources that are better at making guns to making butter. This results in a high opportunity cost of butter.

Constant Opportunity Cost

If an economy instead faces a constant opportunity cost of one producing one of the goods, the production possibilities frontier would be represented by a straight line. This makes intuitive sense as straight lines have a constant slope.

Technology Affects Production Possibilities

If technology changes in an economy, the production possibilities frontier changes accordingly. In the example above, an advance in gun-making technology makes the economy better at producing guns. This means that, for any given level of butter production, the economy will be able to produce more guns than it did before. This is represented by the vertical arrows between the two curves. Thus, the production possibilities frontier shifts out along the vertical, or guns, axis.

If the economy were instead to experience an advance in butter-making technology, the production possibilities frontier would shift out along the horizontal axis, meaning that for any given level of gun production, the economy can produce more butter than it could before. Similarly, if technology were to decrease rather than advance, the production possibilities frontier would shift inward rather than outward.

Investment Can Shift the PPF Over Time

In an economy, capital is used both to produce more capital and to produce consumer goods. Since capital is represented by guns in this example, an investment in guns will allow for increased production of both guns and butter in the future.

That said, capital also wears out, or depreciates over time, so some investment in capital is needed just to keep up the existing level of capital stock. A hypothetical example of this level of investment is represented by the dotted line on the graph above.

Graphic Example of Effects of Investments

Let's assume that the blue line on the graph above represents today's production possibilities frontier. If today's level of production is at the purple point, the level of investment in capital goods (i.e. guns) is more than enough to overcome depreciation, and the level of capital available in the future will be greater than the level available today.

As a result, the production possibilities frontier will shift out, as evidenced by the purple line on the graph. Note that the investment doesn't have to affect both goods equally, and the shift illustrated above is just one example.

On the other hand, if today's production is at the green point, the level of investment in capital goods won't be enough to overcome depreciation, and the level of capital available in the future will be lower than today's level. As a result, the production possibilities frontier will shift in, as evidenced by the green line on the graph. In other words, focusing too much on consumer goods today will hinder an economy's ability to produce in the future.

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How to Graph and Read the Production Possibilities Frontier

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One of the central principles of economics is that everyone faces tradeoffs because resources are limited. These tradeoffs are present both in individual choice and in the production decisions of entire economies. The production possibilities frontier (PPF for short, also referred to as production possibilities curve) is a simple way to show these production tradeoffs graphically.

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This video begins by discussing what a production possibilities curve, by giving the example of a country that makes utensils, it then discusses how a production possibilities curve can grow or shrink based off changes in resources, capital and more. It finishes with explaining what the location on or within the curve imply.
I chose this video because it was very simple with descriptive graphics, they spoke at a very understandable pace, and the information was very relevant. One thing that it taught me was that it is impossible to go beyond the curve, but you can shift it when there is more access to any of the contributors.

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Production Possibilities Curve as a model of a country's economy | AP Macroeconomics | Khan Academy

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This video start showing 3 different types of Production possibility curves, with 3 different shapes, it continues with explaining what each shape means. A line that bows out means an increasing opportunity cost, a line that bows in implies a decreasing opportunity cost, and a straight line implies a constant opportunity cost.

I chose this video because it ties well with the first video, using very similar graphics, and it is the same speaker. I also found that this video builds on the concepts introduced in the first video very well. One bit of useful was the graphics that were provided, I found that they gave a very good visual of what they were saying, unlike the other videos that I found.

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PPCs for increasing, decreasing and constant opportunity cost | AP Macroeconomics | Khan Academy

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This video goes through the process of drawing a production possibilities curve for yourself, starting with the table of your combinations and what you can produce for each product at any production level for the other, then continuing to draw your two scales, each one being the amount of each product you can produce. Next, you plot your points for each combination, and finally connect them with your curve. He finishes off with explaining what the curve means.

I chose this video because it was the only video that I could find that went through the step by step process of drawing a production possibility curve from start to finish

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(1/3) The Production Possibilities Frontier – Economic Lowdown

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Question 1: What did you learn about your topic that surprised you the most?

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Question 1: What did you learn about your topic that surprised you the most?

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Question 2: Provide a real-life example of how this topic is relevant or interestingfor you.

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Question 2: Provide a real-life example of how this topic is relevant or interestingfor you.

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This project is on the production possibilities curve

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Question 3:  If you could pass on your knowledge to a family member or friend, what do you think is the most important thing to pass on?

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Question 3:  If you could pass on your knowledge to a family member or friend, what do you think is the most important thing to pass on?