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) or Production Possibilities Curve (PPC). 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 constant.
Production Possibilities Frontier
The production possibilities frontier or the production possibilities curve show the capabilities of a country. The curve makes some assumptions, like there are that the country only produces two goods, it has a fixed amount of resources and has 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. The opportunity cost is the cost of selecting one alternative over another one. The PPF is used to illustrate the trade-offs that arise from scarcity.
Production Possibilities Frontier Example
The graph shows the production possibilities frontier, and note that it shows what a country can do and not what it does. Here, the country produces Food (F) and Clothes (C).
- A shows only production of clothes
- B shows 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 possibly be
- F shows an unattainable output with current resources
A production possibilities frontier outward shift is only possible if the country discovers new resources or there is a change in technology. An inward shift is also possible in the case of a natural or man-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—which is to say that the resources released by producing one less unit of food are just sufficient to allow the economy to produce the same added amount of clothes, regardless of how much of each item is currently being produced. This is known as production under constant costs.