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. Absolute Advantage

    The ability of a country, individual, company or region to produce ...
  2. Neoclassical Growth Theory

    An economic theory that outlines how a steady economic growth ...
  3. Comparative Advantage

    The ability of a firm or individual to produce goods and/or services ...
  4. Macroeconomics

    The field of economics that studies the behavior of the aggregate ...
  5. Opportunity Cost

    1. The cost of an alternative that must be forgone in order to ...
  6. Trade

    A basic economic concept that involves multiple parties participating ...
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. Retirement

    Economic Indicators To Know

    The economy has a large impact on the market. Learn how to interpret the most important reports.
  3. Savings

    Do Big Soccer Tournaments Boost Market Performance?

    See why the conventional wisdom about the World Cup — that it boosts economic activity and helps local stock markets — is probably wrong.
  4. Economics

    Do the Olympics Boost Market Performance?

    Learn about the economics of the Olympics, and why estimates about stock market boosts for the host country are probably incorrect.
  5. Economics

    Understanding Game Theory

    Game theory is a model for making decisions that weighs the benefits of a choice along with the interaction between participants.
  6. Economics

    Understanding Sticky Wage Theory

    The sticky wage theory states that workers’ earnings respond slowly to changes in the performance of the company or the economy.
  7. Economics

    Understanding Imperfect Competition

    Imperfect competition appears in several different forms. Markets are evaluated by how they compare to, and try to approach, perfect competition.
  8. Insurance

    The Minimum Wage: Does It Matter?

    The numbers show that a fight for a living wage is more important than a fight for a raise in minimum wage.
  9. Investing

    What Happens to Bond ETFs in Stressed Markets?

    We are going to dive a little deeper today at how bond exchange traded funds (ETFs) fare when the markets are stressed.
  10. Economics

    Understanding Monopolistic Competition

    Monopolistic competition exists in industries that have many firms offering similar products or services: for example, restaurants, supermarkets and clothing stores.
RELATED FAQS
  1. 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 >>
  2. 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 >>
  3. Do production possibility frontiers have multiple possible equilibria?

    Explore when production possibility frontiers can have multiple equilibria. Learn how backward-bending curves such as labor ... Read Answer >>
  4. 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 >>
  5. 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 >>
  6. What does "guns and butter" refer to?

    Guns and butter refers to a famous model explaining the relationship between two goods that are important for a nation's ... Read Answer >>
Hot Definitions
  1. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  2. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  3. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
  4. DuPont Analysis

    A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are ...
  5. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  6. Economies Of Scale

    Economies of scale is the cost advantage that arises with increased output of a product. Economies of scale arise because ...
Trading Center