1. The Production Possibilities Frontier

2. Introduction
The Production Possibilities Frontier (PPF) is a graph that shows all possible combinations of two goods when an economy is producing at full potential.
It does not actually show reality, since it assumes only two goods are produced.
It is a simplification that shows what sort of trade-offs would be made in reality.
It only shows what can be produced – not what would be consumed.

3. Examples of Two Goods
Capital Goods- manufactured goods used to produce other goods and services
GUNS, because you can use them to get more resources.
Consumer Goods- intended for final use by individuals
BUTTER, because people eat it and its gone

4. PPF for the Country ALPHA
All resources are being used to produce guns.
1500
Guns
Butter

5. PPF for the Country ALPHA
All resources are being used to produce butter.
1500
Guns
2000
Butter

6. Usually a point is chosen where both items are being produced:

7. PPF for the Country ALPHA
1100
Guns
1500
Butter

8. Production may occur anywhere on or within the frontier.
It may NOT occur beyond the frontier– there are not enough resources to do so.

9. PPF for the Country ALPHA
At point A (on the frontier), production is EFFICIENT. A
Guns
Butter

10. Efficient production means that all resources are being fully employed to produce the most goods and services possible.
Therefore it is impossible to produce more of one item without producing less of the other.

11. PPF for the Country ALPHA
At point B (inside the frontier), production is INEFFICIENT. B
Guns
Butter

12. Inefficient production means not all resources are being fully employed – it is still possible to increase production of both goods.
This could occur during a recession or depression, or in a developing country.

13. The PPF can be used to show tradeoffs.
Any two or more points on the frontier represent tradeoffs.

14. PPF for the Country ALPHA
A and B represent tradeoffs. A produces more guns, B produces more butter. A B
Guns
Butter

15. The PPF can be used to show the opportunity cost of choosing one alternative over the other.

16. PPF for the Country ALPHA
The opportunity cost of A equals the decrease in butter: 1100 units. A
1400 B
Guns
800
600
1700
Butter

17. PPF for the Country ALPHA
The opportunity cost of B equals the decrease in guns: 600 units. A
1400 B
Guns
800
600
1700
Butter

18. The PPF can also show economic growth by moving outward.
This may occur due to additional resources, increasing population, or new technology.

19. PPF for the Country ALPHA
Growth
Guns
Butter

20. Review
Any point on the graph shows how much of both goods is being produced.
Efficiency is shown by whether the point is on the curve (efficient) or within the curve (inefficient).
Tradeoffs are shown by any two points on the curve.
Opportunity cost is shown by the decrease in one good when the other is increased.
Growth is shown by the frontier moving outward.
Constant opportunity cost- is a constant decrease and increase up the line