The Production Possibilities Frontier or PPF is a very simply economic model, probably introduced to you during an introductory lessons of a microeconomics course. Whilst the model is very simply it does contain a wealth of information and is used to illustrate many important economic concepts.
Such concepts include scarcity, opportunity and marginal costs, productive and allocative efficiency as well as the effects of international trade. Indeed for a simple model it is rather rich, and the wealth of this model will be espoused in later posts, but for a simple introduction.
Such concepts include scarcity, opportunity and marginal costs, productive and allocative efficiency as well as the effects of international trade. Indeed for a simple model it is rather rich, and the wealth of this model will be espoused in later posts, but for a simple introduction.
Building the Model:
In order to set up (or build) this model it helps to imagine an extremely simple economy, one that is so simple that it can only produce two goods. Lets call these goods X and Y. In order to produce X and Y this very simple economy must use its available productive resources. Like all economies the availability of productive resources act as a constraint to how much can actually be produced.
Keeping things simple, we consider the resources available to our economy being just capital and labour (K and L). Capital is a very generic term that we use to describe all productive resources available to the economy apart from Labour, and therefore includes land, machinery, software, etc. Later, we will introduce technology and its affects on the economy as described by the PPF.
Keeping things simple, we consider the resources available to our economy being just capital and labour (K and L). Capital is a very generic term that we use to describe all productive resources available to the economy apart from Labour, and therefore includes land, machinery, software, etc. Later, we will introduce technology and its affects on the economy as described by the PPF.
To draw the PPF we must assume that the economy is going to use all its resources to the best of its ability in the production of goods X and Y. Following this assumption we are presented with the PPF shown below.
If this economy decided to put all of its productive resources into the production of good Y, we can see by inspecting the PPF that a maximum of Y1 can be produced. Likewise, if the economy in question were to rather dedicate all of its productive capacity to producing good X, a maximum of X1 could be produced. X1 and Y1 hence represent the limits of production for these two goods.
Now say that the economy was producing at one of these maximum points. If it wanted to change the productive mix present in the economy, that is produce a mixture of both X and Y , it will need to use some of its available resources to produce these other goods. It will have to sacrifice some production of one good in order to produce some of the other, there therefore exists a trade off.
If it were producing only X this economy would need to divert some of its resources away from the production of X and towards the production of Y, and vice versa. This would result in a movement along the PPF. The slope of the PPF represents all combinations of both X and Y that can be produced by this economy and are productively efficient. That is, the slope of the PPF represents all combinations of output that are obtainable give that its finite resources are being utilised to the full of their productive capacity.
All combinations of X and Y that are located within or along the PPF are obtainable but only those found along the PPF are productively efficient. All combinations found beyond the PPF are unobtainable as the economy simply does not have sufficient resources at its disposal to produce that combination.
What happens if the amount of resources increase?
If the amount of resources with the economy were too increase or say an increase in the level of technology increased thus enabling the current resources to be combined more efficiently, then the economy will be able to produce more combinations of X and Y.
Graphically this is illustrated as an outward shift of the PPF. All that the outward shift is illustrating is that there are now a whole host of output combinations that are now obtainable as well as there being a new set of combinations that are productively efficient.
The PPF below illustrates a case where there has either been an increase in the amount of resources or an increase in the level of technology.
As you can see the diagram above illustrates an outward shift of the PPF. The new PPF is simply a larger version of the previous one give that the economy now endowed with more resources is also able to combine these additional resources to produce more output.
This concludes our introduction to the PPF. Future posts will look at some of the more interesting aspects of the model. Specifically we'll look at the concepts of scarcity, opportunity and marginal
costs, productive (we touched on this in this post) and allocative efficiency as well as the effects of
international trade.
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