1.1.4 Production Possibility Frontiers (PPFs)

Production Possibility Frontier

Represents all the combinations of maximum output that can be produced when an economy is being productively efficient (all factors of production being fully employed)

Productive Efficiency

Output is produced using the fewest possible resources/ at the lowest possible cost (where it is not possible to produce more of one good without reducing the production of another)

Economic output constraints

constrained by scarce resources which lead to the production of one good making an opportunity cost for the other

Why PPFs are curved

Due to the fact that some factors of production are finite therefore the opportunity cost of production increases

How will an economy be able to produce more

An economy will only be able to produce more if the quality or quantity of its factors of production increases

PPF graph

How opportunity cost is represented in a PPF diagram

By the downwards slope of the graph. A steeper slope indicates a higher opportunity cost.

One sector growth in PPF graph

This occurs when a factor of production that benefits one industry increases in quantity or quality, allowing the economy to produce more of that good, shifting the PPF outward in that direction.

All sector growth in PPF graph

This occurs when the overall economy experiences growth due to improvements in a factor that benefits both industries enabling the production of more goods across all sectors, shifting the PPF curve outward.

What does the area outside the PPF curve represent

a currently unattainable level of production/future potential output

What does the area inside the PPF curve represent

an inefficient allocation of resources/the economy is not using its resources to its full potential

What does the area on the PPF curve represent

the combination of 2 goods that is productively efficient and indicates maximum possible output