production possibility frontier (...

Production Possibility Frontier ( PPF)?

Sakib Bin Amin, Ph.D.

Assistant Professor

School of Business and Economics

North South University

ECO 101: Introduction to Microeconomics

Sakib-Bin-Amin, Lecturer, Department of Economics, NSU.

The Production Possibility Frontier(PPF)

Opportunity costs are important also to define another important concept widely used in economics that is what we call the Production Possibility Frontier (PPF).

The Production Possibility Frontier is a curve showing all the possible combinations of two goods that a country can produce within a specified time period when all its resources are fully and efficiently employed.


The Production Possibility Frontier(PPF)

Figure: From Class Lecture


The Straight Line PPF: Constant Opportunity Costs

Assumptions:

1. Only two goods can be produced in an economy: computers and television sets.

2. The opportunity cost of 1 television set is 1 computer

3. As more of one good is produced, the opportunity cost between television sets is constant.



Table: Production Possibility Frontier

Combination Computers Television Sets

A 50,000 0

B 40,000 10,000

C 30,000 20,000

D 20,000 30,000

E 10,000 40,000

F 0 50,000



Figure: From Class Lecture



The Economy can produce any of the six combinations of computers and television sets.

If we plot these combinations we’ll get a straight line Production Possibility Frontier because the opportunity cost of producing either good is constant.

For every 10,000 computers not produced, 10,000 television sets are produced- a ratio of 1 to 1. The opportunity cost-1 computer for 1 television ser-that exists between points A and B, also exists between point B and C, C and D, D and E,, and E and F. In other words, opportunity cost is constant at 1 computer for 1 television set.


The Bowed-Outward( Concave-Downward) PPF:

Increasing Opportunity Costs

Assumptions:

1. Only two goods can be produced in n economy: Computers and television Sets

2. As more of one good is produced, the opportunity cost between computers and television sets changes



Table: Production Possibility Frontier

Combination Computers Television Sets

A 50,000 0

B 40,000 20,000

C 25,000 40,000

D 0 60,000




The Economy can produce any of the four combinations of computers and television sets.

If we plot these combinations we’ll get a bowed outward Production Possibility Frontier because the opportunity cost of producing television sets increases as more television sets are produced.

If we move from point A to point B, 20,000 more television sets are produced at the cost of only 10,000 computers. This means for every 1 television set produced, ½ computer is forfeited. Thus, the opportunity cost of 1 television set is ½ computer.




20,000 more television sets are produced by moving from point B to point C at the cost of 15,000 computers. This means for every 1 television set produced, ¾ computer is forfeited. Thus the opportunity cost of 1 television set is ¾ of a computer.

So, we can see that, as the economy produces more television sets, the opportunity cost of producing television sets increases. This gives us the bowed-outward production possibility frontier.


The Law of Increasing Opportunity Costs

The concave shape of the production possibility frontier curve reflects the law of increasing opportunity cost.

As we increase the production of one good, we sacrifice progressively more of the other.

People have varying abilities. At first, company usually employs the people who are most skilled at any business. The most skilled persons can build a product at lower opportunity costs than others.

But when less skilled people are employed, then opportunity cost will increase.

The Production Possibility

Frontier

At point H, resources are either unemployed, or are used inefficiently

Point C is one of the possible combinations

of goods produced when resources are

fully and efficiently employed.

Capital Goods and Consumer

Goods

Consumer goods are goods produced for present consumption.

Capital goods are goods used to produce other goods or services over time.

The Production Possibility

Frontier

The production possibility

frontier curve has a negative

slope that indicates the

trade-off that a society faces

between two goods.

The slope of the ppf is also

called the marginal rate of

transformation (MRT).

production possibility frontier (...

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