PRODUCTION POSSIBILITY FRONTIER
Bhakti Joshi
04 Nov, 2013
Definition: The production possibility frontier (PPF) represents the point at which an economy is most
efficiently producing its goods and services and, therefore, allocating its resources in the best way
possible. The production possibility frontier shows there are limits to production, so an economy, to
achieve efficiency, must decide what combination of goods and services can be produced.
In other words: PPF is a curve depicting all maximum output possibilities for two or more goods given a
set of inputs (resources, labor, etc.). The PPF assumes that all inputs are used efficiently.
Why is this important? It tells us for an economy how much of different goods and services can be
provided and it shows us the tradeoffs among different goods and services.
Main Notes:
Suppose now that in our economy, we only have three participants: Larry, Moe and Curly. They can only do
one of two things: they can either mow lawns or they can wash cars. We want to know the different
combinations of output that Larry, Moe and Curly could produce.
Larry
Moe
Curly
Lawns
1 per hour
1 per hour
2 per hour
Cars
1 per hour
2 per hour
1 per hour
In the above graph, vertical axis shows how many lawns are being mowed, horizontal axis represents how
many cars are being washed. Assume Larry, Moe and Curly works 10 hour per day.
Point A is where all participants are only mowing lawns. Larry can mow 10 lawns per day (1*10), Moe can
also mow 10 lawns (1*10), Curly can mow 20 lawns (2*10), so we get a total of 40 lawns and 0 car washed.
Point B is the point where they are only washing cars. Larry can wash 10 cars a day (1*10), Moe can wash
20 cars (2*10), Curly can wash 10 cars (1*10). For only washing cars, we can get a total of 40 cars washed
and 0 lawns.
What happens in between these points represents the tradeoff between mowing lawns and washing cars in
our simple economy.
Point C represents the case where each of them spend half of the time mowing lawns and half the time
washing cars. Larry mows 5 lawns (1*5), Moe mows 5 lawns (1*5) and Curly mows 10 lawns (2*5) for a
total of 20 lawns. Similarly, Larry washes 5 cars (1*5), Moe washes 10 cars (2*5), Curly washes 5 cars (1*5)
for a total of 20 cars. It gives us the point C (20,20) on our production possibility frontier.
Point D represents the case where Larry spends half of his time mowing lawns and the other half washing
Economics > Microeconomic Principles > Introduction To Microeconomics
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PRODUCTION POSSIBILITY FRONTIER
Bhakti Joshi
04 Nov, 2013
cars, Mow only washes cars and Curly only mows lawns. Larry will give us 5 lawns and 5 cars, Moe will give
us 20 cars and Curly will give us 20 lawns. There are 25 lawns being mowed and 25 cars being washed.
As a result, if we move from point C to D, we actually will be able to produce more goods. We’ll get a
production possibility frontier like the solid line ADB in the graph.
Slope of the production possibility frontier (PPF)
Slope of PPF is equal to ∆Y/ ∆X. From A to D, y variable went from 40 to 25 (change of -15), x variable went
from 0 to 25 (change of 25).
Slope = -15/25= -0.6
From point D to B, now we have y went from 25 to 0 (change of -25), x went from 25 to 40 (change of 15).
Slope = -25/15 = - 1.67
The slope represents how much of one item we have to give up to get more of the other. In this case, it
represents for each additional unit of car washing, how much should we have to give up in terms of lawn
mowing. For line AD, in order to get 25 cars, we have to give up 15 lawns. For line BD, in order to get
another 15 cars, we have to give up 25 lawns.
Shape of PPF and tradeoffs
The PPF represents the nature of the tradeoffs that economies generally face. Think about an economy
where everybody was mowing lawns. Some people are good at mowing lawns while some people are not.
It would be more efficient for us to move those people that are not so good at mowing lawns to doing
something else, in this case washing cars.
To move from point A to point D, we have a reasonably favorable tradeoff, that for each additional car
wash we only need to give up 3/5 of lawn mowing, but when we get to part DB, tradeoff between lawn
mowing and car washing doesn’t seem so attractive. Because now rather than giving up 0.6 of lawn to get
another car washed now we have to give up almost 2.
The last important thing is whether any of these points are inefficient places to produce. It is not really
efficient for our economy to produce at point C. At point C the participants are only washing 20 cars and
mowing 20 lawns, but if resources are used in a smarter way, they can actually produce 25 of each items.
Economics > Microeconomic Principles > Introduction To Microeconomics
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