What is production possibilities frontier

In short, the slope of the PPF from point F to D would be steep, and the opportunity cost of education in terms of healthcare would be high.

More generally, as society produces more and more of some good or service, the cost of production grows larger and larger relative to the cost of producing other goods or services. Thus, the slope of a PPF starts flat and becomes increasingly steeper. In the real world, of course, we have more than two goods and services, and we have more resources than just labor, but the general rule still holds.

For consumers, there is only one scarce resource: budget dollars. As we choose more of one good and less of another, we are simply spending dollars on different items, but every dollar is worth the same in purchasing any item.

For society, there are many scarce resources. In our simple example above, there were two different resources: doctors and teachers, and each resource is better at one job than at the other. In other words, each resource is not worth the same at producing different products. The general rule is when one is allocating only a single scarce resource, the trade-off e. Watch this video to see another explanation as to why the PPF is curved. Figure 2. The lesson is not that society is likely to make an extreme choice like devoting no resources to education at point A or no resources to health at point F.

Instead, the lesson is that the gains from committing additional marginal resources to education depend on how much is already being spent. If, on the one hand, very few resources are currently committed to education, then an increase in resources used can bring relatively large gains. On the other hand, if a large number of resources are already committed to education, then committing additional resources will bring relatively smaller gains.

This pattern is so common that it has been given a name: the law of diminishing returns. This law asserts that as additional increments of resources are devoted to a certain purpose, the marginal benefit from those additional increments will decline. For example, after not spending much at all on crime reduction, when a government spends a certain amount more, the gains in crime reduction could be relatively large. But additional increases after that typically cause relatively smaller reductions in crime, and paying for enough police and security to reduce crime to zero would be tremendously expensive.

The curve of the production possibilities frontier shows that as additional resources are added to education, moving from left to right along the horizontal axis, the initial gains are fairly large, but those gains gradually diminish.

Similarly, as additional resources are added to health care, moving from bottom to top on the vertical axis, the initial gains are fairly large but again gradually diminish. In this way, the law of diminishing returns produces the outward-bending shape of the production possibilities frontier.

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Try It. Measure ad performance. Select basic ads. Create a personalised ads profile. Select personalised ads. Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. In business analysis, the production possibility frontier PPF is a curve that illustrates the possible quantities that can be produced of two products if both depend upon the same finite resource for their manufacture.

PPF also plays a crucial role in economics. It can be used to demonstrate the point that any nation's economy reaches its greatest level of efficiency when it produces only what it is best qualified to produce and trades with other nations for the rest of what it needs. The PPF is also referred to as the production possibility curve or the transformation curve. If production is on the PPF, the country can only produce more of one good if it produces less of some other good.

If the economy is producing less than the quantities indicated by the PPF, this is a sign that resources are not being used to their full potential. In this case, it is possible to increase production of some goods without cutting production in other areas.

The production possibility frontier demonstrates that there are, or should be, limits on production. Each economy must decide what combination of goods and services should be produced in order to attain maximum resource efficiency. In business analysis, the PPF operates under the assumption that the production of one commodity can only increase if the production of the other commodity decreases, due to limited available resources.

Thus, PPF measures the efficiency with which two commodities can be produced simultaneously. This data is of importance to managers seeking to determine the precise mix of goods that most benefits a company's bottom line. The PPF assumes that technological infrastructure is constant, and underlines the notion that opportunity costs typically arise when an economic organization with limited resources must decide between two products.

However, the PPF curve does not apply to companies that produce three or more products vying for the same resource. The PPF is graphically depicted as an arc, with one commodity represented on the X-axis and the other represented on the Y-axis. Each point on the arc shows the most efficient number of the two commodities that can be produced with available resources. Economists use PPFs to demonstrate that an efficient nation produces what it is most capable of producing and trades with other nations for the rest.

For example, if a non-profit agency provides a mix of textbooks and computers, the PPF may show that it can produce either 40 textbooks and seven computers, or 70 textbooks and three computers. The agency's leadership must determine which item is more urgently needed. In this example, the opportunity cost of producing an additional 30 textbooks equals four computers. For another example, consider the chart below.

Imagine a national economy that can produce only two things: wine and cotton. For instance, producing five units of wine and five units of cotton point B is just as desirable as producing three units of wine and seven units of cotton.

Point X represents an inefficient use of resources, while point Y represents a goal that the economy simply cannot attain with its present levels of resources. As we can see, in order for this economy to produce more wine, it must give up some of the resources it is currently using to produce cotton point A.

If the economy starts producing more cotton represented by points B and C , it would need to divert resources from making wine and, consequently, it will produce less wine than it is producing at point A.

Moreover, by moving production from point A to B, the economy must decrease wine production by a small amount in comparison to the increase in cotton output. But if the economy moves from point B to C, wine output will be significantly reduced while the increase in cotton will be quite small.

Keep in mind that A, B, and C all represent the most efficient allocation of resources for the economy. The nation must decide how to achieve the PPF and which combination to use. If more wine is in demand, the cost of increasing its output is proportional to the cost of decreasing cotton production. Markets play an important role in telling the economy what the PPF ought to look like.

Consider point X on the figure above. Being at point X means that the country's resources are not being used efficiently or, more specifically, that the country is not producing enough cotton or wine given the potential of its resources. On the other hand, point Y, as we mentioned above, represents an output level that is currently unattainable by this economy. Suppose an economy produces only two commodities, sugar and coffee. The production possibility diagram will show as a graph the most efficient output levels for the two goods.

The curve points will represent various production levels that are most efficient for the economy, given the limited availability of resources. Points B, D, and C represent the most efficient use of resources to generate the best sugar and coffee production combinations.

If you decide you want to produce more sugar because of an increase in demand, you will have to decrease the amount of coffee produced. The same goes for making more coffee — you will have to sacrifice sugar production. If your production levels are at point A, you are underutilizing the resources available at your disposal.

This can cause supply chain disruptions, among other negative consequences. To achieve point X production levels, you will have to increase the number of resources available.

For example, technological advancements can improve certain aspects of producing coffee and sugar. If you apply the new technology, you can increase production levels to point X.

A country can use this financial model Financial Model Financial modeling refers to the use of excel-based models to reflect a company's projected financial performance. Such models represent the financial situation by taking into account risks and future assumptions, which are critical for making significant decisions in the future, such as raising capital or valuing a business, and interpreting their impact.

GDP determines the economic health of a nation. The production possibility curve will showcase the constraints on achieving different production levels to maximize and improve efficiency. Shifts in the production possibility curve can symbolize either economic expansion or contraction.

Different types of economies will require distinct approaches to determine the production possibility frontier. For example, in a market economy, supply and demand forces will determine the number of goods that should be produced.

This differs from a command economy Command Economy Command economy is a system where the government decides goods production, process, quantity, and price in a country. In this system, the government even manages income and investments. All economies want to see an outward shift in the production possibilities curve.

This can only happen by generating more demand for either or both products.