WHAT IS A PRODUCTION POSSIBILITY FRONTIER?

• A Production Possibility Frontier (PPF), also known as a

Production Possibility Curve (PPC), is a graphical representation
that illustrates the maximum output of two goods or services
that an economy can produce given its available resources and
technology, assuming full utilisation of resources and a fixed
level of technology.
• The PPF is a fundamental concept in economics used to
illustrate scarcity, trade-offs, and opportunity costs.

PRODUCTION POSSIBILITIES TUTOR2U.NET/ECONOMICS

 FEATURES OF A PRODUCTION POSSIBILITY FRONTIER

• Scarcity: The PPF demonstrates the concept of scarcity, which

refers to the limited availability of resources (such as labour,
capital, and land) in relation to the unlimited (and often
growing) wants and needs of a society.
• Trade-offs: The PPF reflects the idea that an economy must
make trade-offs when allocating its resources. Producing more
of one good necessitates producing less of another. The shape
of the PPF highlights the trade-offs required when reallocating
resources between the two goods.

PRODUCTION POSSIBILITIES TUTOR2U.NET/ECONOMICS

 FEATURES OF A PRODUCTION POSSIBILITY FRONTIER

• Opportunity Costs: The opportunity cost of producing more of

one good is the amount of the other good that must be given
up. The slope of the PPF represents the opportunity cost of
switching from producing one good to producing the other.
• Efficiency: Points along the PPF represent an efficient use of
resources, where the economy is fully utilising all available
resources to produce goods and services. Points inside the PPF
are inefficient, indicating that resources are not fully
employed.

PRODUCTION POSSIBILITIES TUTOR2U.NET/ECONOMICS

 FEATURES OF A PRODUCTION POSSIBILITY FRONTIER

• Constraints and Growth: The PPF can shift outward or inward

based on changes in the availability of resources, technological
advancements, or improvements in productivity. An outward
shift of the PPF indicates economic growth.
• Assumptions: The PPF diagram makes several assumptions,
such as fixed resources, a given level of technology, and full
resource utilisation. These assumptions may not always hold.

PRODUCTION POSSIBILITIES TUTOR2U.NET/ECONOMICS

 Production Output of
wheat
possibility
curve
introduction

Competitive supply
Factor inputs can be used
to produce different
products

Output of beef
 Production Output of
possibility wheat

curve
(frontier)
introduction

PPC1

Output of beef
 Production Output of
wheat
possibility
curve
introduction

A production possibility frontier

(PPF) shows the maximum
possible output combinations
of two goods or services an
PPC1
economy can achieve when all
resources are fully and
efficiently employed.
Output of beef
 Production Output of
wheat
Law of diminishing returns:
Marginal output falls as we add extra resources
possibility e.g. into beef

curve
introduction
A
W1

When scarce resources are

reallocated away from wheat
production to the beef industry,
then there is an opportunity
PPC1
cost. This is shown by the
gradient of the PPF.

B1 Output of
 Production Output of
wheat
Steep PPC
Means you are sacrificing a lot of
possibility wheat for only a little extra beef.

curve
introduction
A
W1

When scarce resources are

B
reallocated away from wheat W2
production to the beef industry,
then there is an opportunity
PPC1
cost. This is shown by the
gradient of the PPF.

B1 B2 Output of beef
 Production Output of
wheat
Opportunity cost = lost
output of wheat / gained
possibility output of beef
curve = W2W1 / B2B1
introduction
A
W1

When scarce resources are

B
reallocated away from wheat W2
production to the beef industry,
then there is an opportunity
PPC1
cost. This is shown by the
gradient of the PPF.

B1 B2 Output of beef
 Production Output of
wheat
Opportunity cost = lost
output of wheat / gained
possibility output of beef
curve = -60/10 = 6 units of wheat
for each extra unit of beef
introduction
A
200

When scarce resources are

B
reallocated away from wheat 140
production to the beef industry,
then there is an opportunity
PPC1
cost. This is shown by the
gradient of the PPF.

80 90 Output of beef
 Production Output of
wheat
Because of diminishing
returns, the opportunity cost
possibility of producing extra beef
curve increases as we move down
the PPC.
introduction
A
200

When scarce resources are

B
reallocated away from wheat 140
production to the beef industry,
then there is an opportunity
PPC1
cost. This is shown by the
gradient of the PPF.

80 90 Output of beef
 Production Output of
wheat
Opportunity cost of moving
from B to C = -70/5 = 14 units
possibility of wheat for each extra unit
curve PPC1 of beef.
introduction
A
200

When scarce resources are

B
reallocated away from wheat 140
production to the beef industry,
then there is an opportunity C
70
cost. This is shown by the
gradient of the PPF.
0
80 90 95 Beef
 EXPLAINING THE CONCAVE SHAPE OF THE PPF

The shape of a PPF is commonly drawn as an arc that is concave to the

origin

If the law of diminishing returns holds true, then the opportunity cost of
expanding output of X measured in terms of lost units of Y is increasing.

Resources such as land, capital and labour used in producing wheat might
not be equally suited to producing beef

If the marginal productivity of resources is declining, then the opportunity

cost will increase. We are sacrificing more to get a little extra of something.

PRODUCTION POSSIBILITIES TUTOR2U.NET/ECONOMICS

 WHEN WILL A PPF SHIFT OUTWARDS?

• A Production Possibility Frontier (PPF) shifts outward when

there is an increase in an economy's potential to produce
goods and services.
• This outward shift represents economic growth, which allows
the economy to produce more of both goods or to improve its
production capabilities.
• Several factors can lead to an outward shift of the PPF:

PRODUCTION POSSIBILITIES TUTOR2U.NET/ECONOMICS

 EXPLAINING AN OUTWARD SHIFT IN THE PPF

• Increase in Natural Resources: For example, if a country discovers new oil

reserves, it can increase its production capacity.
• Technological Advancements: Technological progress allows an economy to
produce more output with the same resources or to produce existing output
more efficiently.
• Human Capital Development: Better-educated and more skilled workers can
increase productivity, leading to the production of more goods and services.
• Investment in Capital: Increased investment in physical capital, such as
infrastructure, machinery, and technology, can enhance an economy's
productive capacity and lead to an outward shift of the PPF.

PRODUCTION POSSIBILITIES TUTOR2U.NET/ECONOMICS

 Output of
wheat

Shifts in the
Production
Possibility Curve

For the PPC to shift outwards

there needs to be either an
increase in the factor inputs
available or an improvement PPC1
in the efficiency of supply.

Beef
 Output of
wheat

How to shift from AB to A2B2?

1. Invest in capital such as
machinery, new technology
2. Acquire some extra land A2
3. Buy some extra livestock
4. Employ some extra labour
5. Use higher yielding crops A
6. Invest in GM research –
selective breeding, resistant
crops
7. Increase the productivity of
labour / capital inputs
8. Achieve some innovation such
as lab grown beef PPC1 PPC2

B B2 Beef
 Output of
wheat

Shifts in the
Production
Possibility Curve

For the PPC to shift outwards

there needs to be either an
increase in the factor inputs
available or an improvement PPC1 PPC2
in the efficiency of supply.

B Beef
 Output of
wheat

Shifts in the
Production
Possibility Curve D

An outward shift of the PPC

means that total output of
both beef and wheat can
increase. This is an PPC1 PPC2
improvement in a country’s
potential output (this is
economic growth.) B C Beef
 Output of
wheat

Shifts in the
Production D
Possibility Curve

An outward shift of the PPC

also means that output of
wheat can be increased
without having to sacrifice PPC1 PPC2
any output of beef.

B Beef
 Output of
wheat

Shifts in the PPC1

Production
Possibility Curve

Or the choice could be made

to keep the output of wheat
constant and increase
production of beef. PPC2

B E Beef
Question: How can China Farm
achieve an increase in their Output
productive potential in farm (Food)
output and vehicles (PPC1 shifts
to PPC2)?
PPC1
Shifting out the PPF for China:
PPC2
1. Achieve gains in labour
productivity (higher wages, more
market competition, privatisation)
2. Population growth – natural
A
growth + high net inward
migration
3. Investment in capital - domestic
investment from Chinese firms +
government investment + foreign
investment coming in
4. Investment in natural resources
such as land reclamation,
discovering new minerals
5. Innovation designed to increase
productive potential B Vehicles
 Output of
wheat

Improved
productivity in PPC1
the beef industry
(ceteris paribus)

Higher productivity in the

beef industry with all other
factors held constant causes a
pivotal outward shift in the PPC2
production possibility curve.

B E Beef
 Output of PPC2
wheat
Improved
productivity in PPC1
the wheat
industry (ceteris C
paribus)
A

Higher productivity in the

wheat industry with all other
factors held constant causes a
pivotal outward shift in the
production possibility curve.

B Beef
 OVERVIEW OF KEY CAUSES OF PPF SHIFTING OUT
Cause of an outward shift in the PPC
• Higher productivity / efficiency of
factor inputs
• Better management of factor inputs
• Increase in the stock of capital and
labour supply
• Innovation and invention of new
products and resources
• Discovery / extraction of new natural
resources (land)
PRODUCTION POSSIBILITIES
Comment on the cause of the shift in the PPC
This increases the output per unit of an input
used in production
Improved management reduces waste and
improves product quality
From inward labour migration / increased capital
investment
Improved production processes lift efficiency
(making more with less)
Discovery of commercially-viable land inputs
drives extraction
TUTOR2U.NET/ECONOMICS
 Which of the concepts listed below can NOT be illustrated by a Production
1 Possibility Frontier, such as the one shown here?

Opportunity cost of producing guns

* A in terms of butter

* B Economic growth

Scarcity, choice and resource

* C allocation

The costs of producing guns and

* D butter

PRODUCTION POSSIBILITIES TUTOR2U.NET/ECONOMICS

 The diagram below shows two Production Possibility Frontiers for an
2 economy. The movement from A to B is likely to have occurred because:

Economic resources are underused by the

* A shoe industry

Consumers have switched preferences from

* B shoes to mobile phones

There has been an increase in the

productivity in the mobile phone industry
* C and a decrease in productivity in the shoe
industry

There is more profit in the mobile phone

* D market

PRODUCTION POSSIBILITIES TUTOR2U.NET/ECONOMICS

 An economy’s production possibility frontier is shown below. Which of the
3 following combinations of output are possible?

* A Only A

* B B and C

* C A, B and C

* D A, B, C, D and E

PRODUCTION POSSIBILITIES TUTOR2U.NET/ECONOMICS

 The diagram below shows two production possibility frontiers for an
The diagram below shows two production possibility frontiers. The
4 economy. The movement from A to B is likely to be a result of an increase
movement from A to B is likely to be a result of an increase in…
in…

The relative productivity of producing

* A consumer goods

The resources employed in the

* B production of consumer goods

* C The demand for consumer goods

The opportunity cost of consumer

* D goods

PRODUCTION POSSIBILITIES TUTOR2U.NET/ECONOMICS

 THE PPF DIAGRAM AND ECONOMIC EFFICIENCY (1)

• The Production Possibility Frontier (PPF) diagram is a useful tool in

economics to illustrate different types of economic efficiency.
• It helps demonstrate the concept of efficiency in resource allocation
and provides insights into how an economy can achieve optimal
production levels given its available resources.
• The PPF diagram can highlight three key types of economic
efficiency: productive efficiency, allocative efficiency, and dynamic
efficiency.

PRODUCTION POSSIBILITIES TUTOR2U.NET/ECONOMICS

 THE PPF DIAGRAM AND PRODUCTIVE EFFICIENCY

• Productive efficiency occurs when an economy is producing goods

and services at the lowest possible cost, given its existing
technology and resources.
• On the PPF diagram, productive efficiency is achieved when the
economy is operating on the PPF curve. Points on the PPF
represent the maximum output attainable with the given inputs,
and any point inside the PPF indicates underutilization of resources.
• If the economy operates inside the PPF, it is not reaching productive
efficiency because resources are being wasted.

PRODUCTION POSSIBILITIES TUTOR2U.NET/ECONOMICS

 THE PPF DIAGRAM AND ALLOCATIVE EFFICIENCY
• Allocative efficiency occurs when an economy is producing a mix of goods and
services that best aligns with consumer preferences and social needs. It
represents the ideal distribution of resources among different goods to
maximize overall satisfaction.
• On the PPF diagram, allocative efficiency is achieved when the economy is
producing at a point on the PPF that matches society's preferences.
• If the economy is producing at a point inside the PPF, it is not achieving
allocative efficiency because it can produce more of one good without
sacrificing the production of another good.
• A point outside the PPF, it is not feasible, and achieving such a point would
require additional resources or technological advancements.

PRODUCTION POSSIBILITIES TUTOR2U.NET/ECONOMICS

 THE PPF DIAGRAM AND DYNAMIC EFFICIENCY

• Dynamic efficiency refers to an economy's ability to grow and expand

its production possibilities over time. This involves shifting the PPF
outward through technological advancements, investments, and
innovations.
• An outward shift of the PPF indicates that the economy has achieved
dynamic efficiency, allowing it to produce more goods and services
than before with the same resources.
• This might have been achieved through process innovation such as
lean manufacturing used in car-making, or innovation in farming that
increases yields of particular crops each year.

PRODUCTION POSSIBILITIES TUTOR2U.NET/ECONOMICS

 PPF AND EFFICIENCY – OVERVIEW DIAGRAM
Output of F is an output
Pizza F combination
Any point on
that is not yet
the PPF is an attainable as it
efficient lies beyond the
A
allocation of existing PPF
resources
whereas points
D B
inside the PPF
show an
inefficient A, B and C are
allocation of all efficient
D and E are inefficient output
resources since C
it is possible to combinations – this combinations
means that not all E
produce more as they lie on
of one good resources are being the existing PPF
without fully utilized
sacrificing any
of the other.
Output of Sugar

PRODUCTION POSSIBILITIES TUTOR2U.NET/ECONOMICS