Unit 1 Micro: Production Possibility Frontier

A production possibility frontier (PPF) shows the maximum possible output combinations of two goods or services an economy can achieve when all resources are fully and efficiently employed

We normally draw a PPF on a diagram as concave to the origin i.e. as we move down the PPF, as more resources are allocated towards Good Y the extra output gets smaller – so more of Good X has to be given up in order to produce Good Y

This is an explanation of the law of diminishing returns and it occurs because not all factor inputs are equally suited to producing items

Key PPF Diagrams

AS Micro PPF Diagrams from tutor2u

PPF and Economic Efficiency

Combinations of the output of consumer and capital goods lying inside the PPF happen when there are unemployed resources or when resources are used inefficiently

Producing more of both goods would represent an improvement in welfare and a gain in what is called allocative efficiency.

Shifts in the Production Possibility Frontier

The PPF will shift outwards when:

• There are improvements in productivity and efficiency perhaps because of the introduction of new technology or advances in the techniques of production or an increase in the quality of labour
• Better management of existing resources
• More factors of production are available and used perhaps due to an increase in the size of the workforce due to inward migration or a rise in the amount of capital available for businesses due to a rise in business investment
• The discovery of new natural resources such as shale gas
• Innovation and technological advances which makes exploration and extraction of known resources more commercially viable

Can a production possibility frontier shift inwards?

Yes – if this happened, then the productive potential of a country must have suffered perhaps due to:

• 1.The damaging effects of severe natural disasters such as a tsunami, floods, persistent drought and other extreme weather events

• 2.The economic damage caused by war and other types of conflict for example in failing states

• 3.Large scale net migration of people out of a country e.g. when there is very high unemployment

• 4.A fall in productivity of labour

Test your understanding here