Production Possibility Frontier - PPF

Loading the player...

What is the 'Production Possibility Frontier - PPF'

The production possibility frontier (PPF) is a curve depicting all maximum output possibilities for two goods, given a set of inputs consisting of resources and other factors. The PPF assumes that all inputs are used efficiently.

Factors such as labor, capital and technology, among others, will affect the resources available, which will dictate where the production possibility frontier lies. The PPF is also known as the production possibility curve or the transformation curve.

BREAKING DOWN 'Production Possibility Frontier - PPF'

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.

Understanding and Interpreting the PPF

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.

Understanding the Pareto Efficiency

The Pareto Efficiency is a concept named after Italian economist Vilfredo Pareto that measures the efficiency of the commodity allocation on the PPF. The Pareto Efficiency states that any point within the PPF curve is considered inefficient because the total output of commodities is below the output capacity. Conversely, any point outside the PPF curve is considered to be impossible because it represents a mix of commodities that will take more resources to produce than can be obtained.

Therefore, any mix of two commodities, given limited resources, is only efficient when it lies on the PPF curve, with one commodity on the X axis and one commodity on the Y axis. Achieving the Pareto Efficiency means that an economy is operating at maximum potential and lies directly on the PPF.

RELATED TERMS
  1. Marginal Rate Of Transformation

    The rate at which one good must be sacrificed in order to produce ...
  2. Pareto Efficiency

    An economic state where resources are allocated in the most efficient ...
  3. Production Efficiency

    1. An economic level at which the economy can no longer produce ...
  4. Pareto Principle

    A principle, named after economist Vilfredo Pareto, that specifies ...
  5. Economic Efficiency

    A broad term that implies an economic state in which every resource ...
  6. Commodity

    1. A basic good used in commerce that is interchangeable with ...
Related Articles
  1. Investing

    The Production Possibility Frontier (PPF)

    A production possibility frontier (PPF) is a range of answers to the question, “What is our maximum production capacity?”
  2. Economics

    Explaining Pareto Efficiency

    Pareto efficiency is an economic state where resources are allocated in the most efficient manner.
  3. Economics

    Understanding Production Efficiency

    Production efficiency is the point at which an economy cannot increase output of a good or service without lowering the production of another product.
  4. Investing Basics

    When Will it Be Safe to Buy Commodities?

    When will it be safe to buy commodities (and which ones)? A closer look at the commodities markets and how they move.
  5. Economics

    A Practical Look At Microeconomics

    Learn how individual decision-making turns the gears of our economy.
  6. Investing Basics

    Understanding the Commodity Market

    There are currently 50 physical and virtual commodity markets worldwide where almost 100 primary commodities trade through the exchange of ownership rights.
  7. Economics

    Explaining Economic Efficiency

    Economic efficiency is achieved when every resource is optimally allocated to minimize waste and best serve each person in that economy.
  8. Investing

    3 Reasons to Invest in Discounted Commodities

    Though they're selling at depressed prices, there are several reasons that it could make sense to invest in commodities now.
  9. Investing Basics

    How To Invest In Commodities

    Find out which futures, options or funds will be your perfect commodity portfolio fit.
  10. Investing Basics

    The Importance of Commodity Pricing in Understanding Inflation

    Commodity prices are believed to be a leading indicator of inflation, but does it always hold?
RELATED FAQS
  1. Is the production possibility frontier used by businesses to calculate their production ...

    Understand how businesses use the production possibility frontier (PPF) to project business goals and make important decisions ... Read Answer >>
  2. Can you calculate the production possibility frontier in n-dimensional space?

    Find out how PPF in n-dimensional space can interpret the relationship between production inputs and outputs required for ... Read Answer >>
  3. How do I calculate the production possibility frontier in Excel?

    Learn how to create production possibility frontier curves in Microsoft Excel and understand the importance of production ... Read Answer >>
  4. Is Pareto Efficiency the same thing as perfect competition?

    Find out how a perfectly competitive market should lead to Pareto efficiency, at least according to standard neoclassical ... Read Answer >>
  5. Can you calculate more than two inputs with the production possibility frontier?

    Understand how production possibility frontiers are used in business and learn more about how additional products may be ... Read Answer >>
  6. How were the figures 80 and 20 arrived at in the 80-20 rule (Pareto Principle)?

    Read about the origins of the 80-20 rule, also known as the Pareto principle, and how to interpret the rule for future productive ... Read Answer >>
Hot Definitions
  1. Physical Capital

    Physical capital is one of the three main factors of production in economic theory. It consists of manmade goods that assist ...
  2. Reverse Mortgage

    A type of mortgage in which a homeowner can borrow money against the value of his or her home. No repayment of the mortgage ...
  3. Labor Market

    The labor market refers to the supply and demand for labor, in which employees provide the supply and employers the demand. ...
  4. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  5. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  6. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
Trading Center