Production Possibilities Frontier
PPF
Chapter 1 Section 3
PRODUCTION POSSIBILITIES
• Production Possibilities Frontier
– The boundary between the combinations of
goods and services that can be produced and
the combinations that cannot be produced,
given the available factors of production and the
state of technology.
– The PPF is a valuable tool for illustrating the
effects of scarcity and its consequences.
PRODUCTION POSSIBILITIES
Figure 1.1 shows
the
PPF for bottled
water and CDs.
Each point on the
graph represents a
column of the table.
The line through
the points is the
PPF.
The PPF puts three features of
production possibilities in sharp
focus:
1. Attainable and unattainable
combinations
2. Full employment and unemployment
3. Tradeoffs and free lunches
–Because the PPF shows the limits
to production, it separates
attainable combinations from
unattainable ones.
–Figure 3.2 on the next slide
illustrates the attainable and
unattainable combinations.
We can produce at any
point inside the PPF or on
the frontier.
The PPF separates
attainable combinations
from unattainable
combinations.
Points outside the PPF
such as point G are
unattainable.
yment
–Full employment occurs when all the
available factors of production are
being used.
–Unemployment occurs when some
factors of production are not used.
–Figure 1.2 on the next slide illustrates
full employment and unemployment.
1. When resources are
fully employed,
production occurs at
points on the PPF such
as D and E.
2. When resources are
unemployed,
production occurs at a
point inside the PPF
such as point H.
–Tradeoff
–A constraint or limit to what is possible that
forces an exchange or a substitution of one
thing for something else.
–To emphasize that every choice involves a
cost, economists say, “There is no such
thing as a free lunch.”
–But there would be a free lunch—
something for nothing—if we were not at a
point on the PPF.
1. When production is on
the PPF, we face a
tradeoff. There’s no free
lunch.
2. If production were inside
the PPF, there would be a
free lunch. We could get
more of both goods
without forgoing either
good.
OPPORTUNITY COST CALULATIONS
Finding the OC of a trade-off
If I make 15 CDs,
how many bottles
of water can I
make?
How many bottles of
water could I make
if I made zero CDs?
Thus: If I make 15 CDs,
how many bottles of
water am I NOT
making? In other
words, what is the OC
of 15 CDs?
OPPORTUNITY COST CALULATIONS
Finding the OC of a trade-off
If I make 12 CDs,
how many bottles
of water can I
make?
How many bottles of
water am I NOT
making as a result of
making 12 CDs?
What is the OC of
12 CDs?
I am making 2 bottles of water (point C). I want to make
1 more bottle of water (go to point D).
How many CDs am I
making when I make
2 bottles of water?
How many CDs am I
making when I am
making 3 bottles of
water?
How many CDs did I
have to give up to
make that extra Bottle
of Water?
OPPORTUNITY COST PER UNIT
• The Per Unit Opportunity Cost of a Bottle
of Water
– The opportunity cost of a bottle of water is
the decrease in the quantity of CDs divided
by the increase in the number of bottles of
water as we move along the PPF
– Figure 3.5 illustrates the calculation of the
opportunity cost of a bottle of water.
Moving from A to B, 1 bottle of water costs 1 CD.
Moving from B to C, 1 bottle of water costs 2 CDs.
Calculate the OC of each 1 unit
increase of Bottled Water (moving
from point A to B, B to C, C to D, etc)