Economics is the study of how choices are made under conditions of scarcity. One factor that strongly influences choices is how much of a good can be produced, and how choosing to produce one good affects the ability to produce another. This relationship can be shown graphically with a production possibility curve.
As an example to model, consider a bakery.
A bakery is capable of producing 1000 loaves of bread per day, if the only product produced is bread. The bakery could also produce 5000 muffins per day, if all of the bakery’s resources were put into the production of muffins.
The quantity of each good that could be produced by the bakery could be shown in a table, or schedule.
The table shows what would happen if the bakery split its resources between bread and muffins.
In this example, if the bakery used enough resources to produce 400 loaves of bread, they would only be able to produce 3960 muffins if they devoted all of their remaining resources to making muffins.
The data in a schedule of production possibilities is more easily understood if the quantities are graphed with one product on the horizontal axis and the other product on the vertical axis. A curve, called the Production Possibilities Frontier, connects the points from the schedule.
As before, if the bakery used enough resources to produce 400 loaves of bread, they would only be able to produce 3960 muffins.
Production Possibilities Frontier
A production possibilities frontier curve shows the maximum production if all resources are being used as efficiently as possible.
Suppose that on a given day, the bakers produced 450 loaves of bread but only 3250 muffins. If that point were added to the graph, it would lie inside the production possibilities frontier.
Any point that lies inside (under) the curve is a possible level of production. Because such a point does not lie on the curve, it shows that the resources are not being used as efficiently as possible.
Did You Get It?
Find the level of muffin production that corresponds to 600 loaves of bread production and lies on the production possibilities frontier.
Production Possibilities Frontier
A production possibilities frontier curve can also help determine whether a given level of production is even possible.
If a customer asks the manager of the bakery to supply 4500 muffins, and the manager already has orders for 500 loaves of bread, can the manager fill the customer’s order?
When the point is added to the graph, it lies outside (above) the production possibilities frontier. No allocation of resources will allow that level of production. The manager cannot fill an order for 4500 muffins and also produce 500 loaves of bread.
Did You Get It?
Is the production of 800 loaves and 3000 muffins possible? Why or why not?
Production Possibilities Frontier
A production possibilities frontier curve also shows the opportunity costs of changing production. By connecting two points with horizontal and vertical lines, the opportunity cost of a change in production can be seen. Suppose the manager is considering changing loaf production from 400 to 600 loaves per day.
Adding 200 loaves of bread to daily production will mean the bakery must make 1000 fewer muffins. Therefore, the opportunity cost of the extra 200 loaves is 1000 muffins. Viewed the other way, the opportunity cost of changing muffin production from 2960 to 3960 is 200 loaves of bread that could have been produced instead.
Production Possibilities Frontier
200 loaves
1000 muffins
The shape of a production possibilities frontier graph is usually similar to what is shown in this example—the graph bends away from the origin. This is because the opportunity cost is not the same at both ends of the curve.
The top left of the graph shows that the opportunity cost of changing from no loaf production to 100 loaves per day is 140 muffins. Changing from 900 to 1000 loaves per day, also an increase of 100 loaves per day, has a higher opportunity cost of 860 muffins per day.
This difference is because some resources are better suited to making one good than another, and using those resources properly will be more efficient.
Did You Get It?
Where on the curve is the opportunity cost of changing production greatest?
Production Possibilities Frontier
100 loaves
140 muffins
100 loaves
860 muffins
Wrap Up
The production possibilities frontier, or PPF, is a curve that shows the maximum quantity of one good that can be produced for each possible quantity of another good produced. The quantity of one product is measured on the horizontal axis and the quantity of the other is measured on the vertical axis.
For more information on production possibilities frontiers, read Chapter 1, Module 2 of Explorations in Economics and study the Module 2 Review and Assessment. You can also test yourself with the Module 2 online quiz here on the BCS.