Example: A farmer has a 10 acre field and can grow either wheat or
barley on it. The only input is land. He has the following possible combination:
Wheat
40
30
20
10
0
Barley
0
5
10
15
20
Draw
the PPF with Wheat on vertical axis. Note that this is a straight line.
Any point on the Production Possibility Frontier is said to be
"efficient". The economy is getting the most it can given the fixed
resources & technology, and there are many possible efficient
combinations.
Inside the PPF is considered inefficient,
since the business can produce more of one good without producing less
of the other. Inefficiencies arise from unemployed resources or
inefficient management. Points outside the PPF are currently
unavailable. The PPF can be increased by economic growth which shifts
the curve outward. Growth can come from more/better inputs like capital
& labour, or from better technology/organization. PPF shows the
trade-off between quantities of the two goods (is always downward or
negatively sloped).
PPF
illustrates the opportunity cost of gaining more of one good.
Opportunity cost is equal to "loss" divided by "gain". Opportunity cost
of good on vertical axis = 1/absolute slope of PPF. Opportunity cost of
good on horizontal axis = absolute slope of PPF. Therefore, when the
PPF is a straight line, opportunity cost is constant. What is the
opportunity of Barley and Wheat in the example above? One good can be
traded off for the other at a constant rate, and inputs are equally
good at producing either good.
When the Production
Possibilities Frontier is a curve (bowed out from the origin), the
opportunity cost increases as we want more of a good. Inputs become
specialized, and it becomes more efficient to produce one good than the
other.
barley on it. The only input is land. He has the following possible combination:
Wheat
40
30
20
10
0
Barley
0
5
10
15
20
Draw
the PPF with Wheat on vertical axis. Note that this is a straight line.
Any point on the Production Possibility Frontier is said to be
"efficient". The economy is getting the most it can given the fixed
resources & technology, and there are many possible efficient
combinations.
Inside the PPF is considered inefficient,
since the business can produce more of one good without producing less
of the other. Inefficiencies arise from unemployed resources or
inefficient management. Points outside the PPF are currently
unavailable. The PPF can be increased by economic growth which shifts
the curve outward. Growth can come from more/better inputs like capital
& labour, or from better technology/organization. PPF shows the
trade-off between quantities of the two goods (is always downward or
negatively sloped).
Production Possibilities Frontier and Opportunity Costs
PPF
illustrates the opportunity cost of gaining more of one good.
Opportunity cost is equal to "loss" divided by "gain". Opportunity cost
of good on vertical axis = 1/absolute slope of PPF. Opportunity cost of
good on horizontal axis = absolute slope of PPF. Therefore, when the
PPF is a straight line, opportunity cost is constant. What is the
opportunity of Barley and Wheat in the example above? One good can be
traded off for the other at a constant rate, and inputs are equally
good at producing either good.
When the Production
Possibilities Frontier is a curve (bowed out from the origin), the
opportunity cost increases as we want more of a good. Inputs become
specialized, and it becomes more efficient to produce one good than the
other.
