Production Possibility Frontier

… a core term used in Economic Analysis and Atlas102

Definition

Investopedia (reference below) defines the production possibility frontier (PPF) as a curve depicting all maximum output possibilities for two goods, given a set of inputs consisting of resources and other factors.

Investopedia goes on to say:

“The PPF indicates the production possibilities of two commodities when resources are fixed. This means that the production of one commodity can only increase when the production of the other commodity is reduced, due to the availability of resources. Therefore, the PPF measures the efficiency in which two commodities can be produced together, helping managers and leaders decide what mix of commodities are most beneficial. The PPF assumes that technology is constant, resources are used efficiently, and that there is normally only a choice between two commodities.

“The PPF drives home the idea that opportunity costs normally come up when an economic organization with limited resources must decide between two alternatives. The PPF is depicted graphically as an arc, with one commodity on the X axis and the other commodity on the Y access. At each point on the arc, there is an efficient number of the two commodities that can be produced with available resources. Therefore, it’s up to the organization to look at the PPF and decide what number of each commodity should be produced to maximize the overall benefit to the economy.

“If, for example, a government organization is deciding between the production mix of textbooks and computers, and it can produce either 40 textbooks and 7 computers or 70 text books and 3 computers, it’s up to that organization to determine what it needs more. In this example, the opportunity cost of producing an additional 30 textbooks is 4 computers.”

Atlas topic, subject, and course

Producer Theory and Competition (core topic) in Economic Analysis and Atlas102 Economic Analysis.

Source

Investopedia, Production Possibility Frontier – PPF, at http://www.investopedia.com/terms/p/productionpossibilityfrontier.asp, accessed 11 May 2016.

Page created by: Ian Clark, last modified 11 May 2016.