The best way to show a country’s available resources and the maximum two goods produced from those resources is a Production Possibilities Frontier (PPF). Production Possibilities Curve (PPC) is another name for the Production Possibilities Frontier.
One of the first things to note is that often Economists make assumptions in models; such as “ceteris paribus” meaning all else remains the same or all other variables are kept constant. Economists do this to isolate a relationship.
Production Possibility Frontier
The production possibilities frontier or the production possibilities curve show the capabilities of a country. The Production Possibility Frontier makes some assumptions. Such as the country only produces two goods, it has a fixed amount of resources and a static level of technology.
A production possibility curve even shows the basic economic problem of a country having limited resources, facing opportunity costs and scarcity in the economy. Selecting one alternative over another one is known as opportunity cost. Economists use PPF to illustrate the trade-offs that arise from scarcity.
Production Possibilities Frontier Example
The following graph shows the production possibilities frontier. It notes what a country can do, and not what it does. Here, the country produces Food (F) and Clothes (C).
- A shows just the production of clothes
- B indicates only production of food
- C is one possible combination (75F, 100C)
- D is another combination (50F, 150C)
- E shows inefficient utilization of resources or unemployed resources, i.e., output is less than what it can be
- F shows an unattainable production with current resources
An outward shift of the production possibilities frontier is only possible if the country discovers new resources or there is a change in technology. An inward shift is also possible. This can happen if there is a natural or human-made disaster, like a hurricane destroying a factory and machinery.
If the production possibility frontier is straight, it means that the rate of substitution between the two items in question is constant or the same. Consequently, the resources saved by producing one less unit of food are just sufficient to allow the economy to produce the same added amount of clothes. This is constant regardless of how much of each item the country is currently producing. This consistent trade-off is known as production under constant costs.