PRODUCTION POSSIBILITIES FRONTIER (PPF)

Production Possibilities Frontier

• Economic model that describes your ECONOMIC FRONTIER - the distribution and production choice you make because of limited resources.

• Simplified model of a decision-making reality - how much to produce of something based on the limited resources available.

• Shows how much we give up every time we choose more of one thing over another.

Limitations to the Model

1. Does not show a complete reality, it assumes only 2 things are produced.

2. It is a simplification that shows what sort of trade-offs would be made in reality.

3. Only shows what can be produced, not what can be consumed.

Frontier Line Segment

• Scarcity = limits

• “FULL EMPLOYMENT”, all inputs and outputs are used. All your time and energy are at play here.

• All possibilities within the frontier limits can be produced and are possible.

• All possibilities outside the frontier limits are impossible to produce or achieve.

Scarcity (Limits)

• Forces us to choose, and when we choose, there is an opportunity cost (OPC), the value of the next best choice given up to gain more of another.

Nature of Opportunity Cost (OPc)

• Varies from choice to choice because the quality and quantity of resources utilized and needed for goods will vary over time, from good to good.

• Increases as more of one thing is given up for another.