Due to scarcity of resources, we cannot satisfy all our wants. Even if an economy uses all its resources in the best possible manner, its capabilities are restricted due to scarcity of resources. As we cannot have everything that we want, we are forced to make economic decisions. These decisions take the form of choices among alternate goods and services that will best satisfy our wants.
Thus, the society must decide what to produce out of an almost infinite range of possibilities. As the choice is to be made between infinite possibilities, economists assumed a very basic economy with only two goods (say, guns and butter). Economists have traditionally represented this range of choices by what they call a ‘Production Possibility Schedule.
When this schedule is graphically represented, it is called the Production Possibility Frontier (PPF) or Production Possibility Curve (PPC). Production Possibility Frontier (PPF) refers to the graphical representation of possible combinations of two goods that can be produced with given resources and technology. Alternately, PPF is the locus of various possible combinations of two goods that can be produced with given resources and technology.
Assumptions for PPF
Production possibility frontier is based on the following assumptions:
- The amount of resources in an economy is fixed, but these resources can be transferred from one use to another;
- With the help of given resources, only two goods can be produced;
- The resources are fully and efficiently utilized;
- Resources are not equally efficient in production of all products. So, when resources are transferred from production of one good to another, the productivity decreases;
- The level of technology is assumed to be constant.
The two goods have been taken just for the sake of simplicity and easy understanding. However, the analysis involved can be applied equally well, to any combination of goods.
Characteristics of PPF
The two basic characteristics or features of PPF are:
1. PPF slopes downwards
PPF shows all the maximum possible combinations of two goods, which can be produced with the available resources and technology. In such a case, more of one good can be produced only by taking resources away from the production of another good. As there exists an inverse relationship between changes in the quantity of one commodity and change in the quantity of the other commodity, PPF slopes downwards from left to right.
2. PPF is Concave Shaped
PPF is concave shaped because of increasing marginal opportunity costs, i.e. more and more units of one commodity are sacrificed to gain an additional unit of another commodity.
Opportunity Cost, MOC and MRT
Opportunity cost is the cost of any activity measured in terms of the best alternative foregone. Marginal Opportunity Cost (MOC) refers to the number of units of a commodity sacrificed to gain one additional unit of another commodity. In case of PPF, MOC is always increasing, i.e. more and more units of a commodity have to be sacrificed to gain an additional unit of another commodity. Marginal Rate of Transformation (MRT) is the ratio of the number of units of a commodity sacrificed to gain an additional unit of another commodity.
MRT = ∆ Units Sacrificed/ ∆ Units Gained.
In the given example of guns and butter, MRT = ∆ Guns/ ∆ Butter
Change in Production Possibility Frontier
Production Possibility Frontier may shift outward if there is a technological advancement, increase in labor force or availability of additional resources. On the other hand, PPF will shift inward if there is depletion in resources, decrease in labor force or outdated technology.
The Production Possibility Frontier (PPF) can shift or change due to various factors such as:
- Increase in resources: An increase in resources will shift the PPF outward (to the right). This is because with more resources, an economy can produce more of both goods.
- Technological advancement: With technological advancement, an economy can produce more output with the same amount of resources. This will also shift the PPF outward.
- Change in the quality of resources: A change in the quality of resources will affect their productivity. For example, if the quality of land or labor improves, it will increase the productivity of resources and shift the PPF outward.
- Natural disasters or war: Natural disasters or war can reduce the availability of resources, which will shift the PPF inward.
Overview of Production Possibility Frontier:
The Production Possibility Frontier (PPF) is a useful tool for analyzing the trade-offs an economy faces when choosing what goods to produce. The PPF shows the maximum combination of two goods that can be produced with given resources and technology. The slope of the PPF represents the opportunity cost of producing one good in terms of the other. The PPF is concave because of increasing marginal opportunity costs. The PPF can shift outward due to an increase in resources, technological advancement, or an improvement in the quality of resources. It can shift inward due to natural disasters or war.