Production–possibility frontier

In microeconomics, a production–possibility frontier (PPF), production possibility curve (PPC), or

production possibility boundary (PPB) is a graphical representation showing all the possible options of
output for two goods that can be produced using all factors of production, where the given resources are
fully and efficiently utilized per unit time. A PPF illustrates several economic concepts, such as allocative
efficiency, economies of scale, opportunity cost (or marginal rate of transformation), productive efficiency,
and scarcity of resources (the fundamental economic problem that all societies face).[1]

This tradeoff is usually considered for an economy, but also applies to each individual, household, and
economic organization. One good can only be produced by diverting resources from other goods, and so
by producing less of them.

Graphically bounding the production set for fixed input quantities, the PPF curve shows the maximum
possible production level of one commodity for any given production level of the other, given the existing
state of technology. By doing so, it defines productive efficiency in the context of that production set: a
point on the frontier indicates efficient use of the available inputs (such as points B, D and C in the graph),
a point beneath the curve (such as A) indicates inefficiency, and a point beyond the curve (such as X)
indicates impossibility.

PPFs are normally drawn as bulging upwards or outwards from the

origin ("concave" when viewed from the origin), but they can be
represented as bulging downward (inwards) or linear (straight),
depending on a number of assumptions.

An outward shift of the PPC results from growth of the availability

of inputs, such as physical capital or labour, or from technological
progress in knowledge of how to transform inputs into outputs.
Such a shift reflects, for instance, economic growth of an economy
already operating at its full productivity (on the PPF), which means
that more of both outputs can now be produced during the specified
period of time without sacrificing the output of either good.
Conversely, the PPF will shift inward if the labour force shrinks, Figure 1: A production possibilities
the supply of raw materials is depleted, or a natural disaster frontier
decreases the stock of physical capital.

However, most economic contractions reflect not that less can be produced but that the economy has started
operating below the frontier, as typically, both labour and physical capital are underemployed, remaining
therefore idle.

In microeconomics, the PPF shows the options open to an individual, household, or firm in a two-good
world. By definition, each point on the curve is productively efficient, but, given the nature of market
demand, some points will be more profitable than others. Equilibrium for a firm will be the combination of
outputs on the PPF that is most profitable.[2]
From a macroeconomic perspective, the PPF illustrates the production possibilities available to a nation or
economy during a given period of time for broad categories of output. It is traditionally used to show the
movement between committing all funds to consumption on the y-axis versus investment on the x-axis.
However, an economy may achieve productive efficiency without necessarily being allocatively efficient.
Market failure (such as imperfect competition or externalities) and some institutions of social decision-
making (such as government and tradition) may lead to the wrong combination of goods being produced
(hence the wrong mix of resources being allocated between producing the two goods) compared to what
consumers would prefer, given what is feasible on the PPF.[3]

Position
The two main determinants of the position of the PPF at any
given time are the state of technology and management
expertise (which are reflected in the available production
functions) and the available quantities of factors of production
(materials, direct labor, and factory overhead).

Only points on or within a PPF are actually possible to achieve

in the short run. In the long run, if technology improves or if
the supply of factors of production increases, the economy's
capacity to produce both goods increases; if this potential is
realized, economic growth occurs. That increase is shown by a
shift of the production-possibility frontier to the right.
Conversely, a natural, military or ecological disaster might
move the PPF to the left in response to a reduction in an
Figure 2: Unbiased expansion of a
economy's productive capability.[4] Thus all points on or production possibility frontier
within the curve are part of the production set: combinations of
goods that the economy could potentially produce.

If the two production goods depicted are capital investment (to increase future production possibilities) and
current consumption goods, the higher the investment this year, the more the PPF would shift out in
following years.[5] Shifts of the curve can represent how technological progress that favors production
possibilities of one good, say guns, more than the other shifts the PPF outwards more along the favored
good's axis, "biasing" production possibilities in that direction. Similarly, if one good makes more use of
say capital and if capital grows faster than other factors, growth possibilities might be biased in favor of the
capital-intensive good.Also a shift in the PPF could depict that there's an improvement in technology or
good use of capital goods.[6][7]

Properties

Efficiency

Production-Possibility Frontier delineates the maximum amount/quantities of outputs (goods/services) an

economy can achieve, given fixed resources (factors of production) and fixed technological progress.

Points that lie either on or below the production possibilities frontier/curve are
possible/attainable: the quantities can be produced with currently available resources and
technology.
Points that lie above the production possibilities frontier/curve are not
possible/unattainable because the quantities cannot be produced using currently available
 resources and technology.
Points that lie strictly below the frontier/curve are
inefficient, because the economy can produce more of
at least one good without sacrificing the production of
any other good, with existing resources and technology.
Points that lie on the frontier/curve are efficient.

Points that are unattainable can be achieved through external trade

and economic growth. Examples include importations of resources
and technology, and the increase in the production of goods and
services.

Specifically, at all points on the frontier, the economy achieves

Figure 3: Production-possibilities
productive efficiency: no more output of any good can be achieved
frontier for an economy with two
from the given inputs without sacrificing output of some good. products illustrating Pareto efficiency

Some productive efficient points are Pareto efficient: impossible to

find any trade that will make no consumer worse off. Pareto
efficiency is achieved when the marginal rate of transformation
(slope of the frontier/opportunity cost of goods) is equal to all
consumers' marginal rate of substitution.

Similarly, not all Pareto efficient points on the frontier are

Allocative efficient. Allocative efficient is only achieved when the
economy produces at quantities that match societal preference.

A PPF typically takes the form of the curve illustrated above. An

economy that is operating on the PPF is said to be efficient,
meaning that it would be impossible to produce more of one good
without decreasing production of the other good. In contrast, if the
economy is operating below the curve, it is said to be operating Figure 4: Frontier points that violate
allocative efficiency
inefficiently because it could reallocate resources in order to
produce more of both goods or some resources such as labor or
capital are sitting idle and could be fully employed to produce more
of both goods.

For example, if one assumes that the economy's available quantities of factors of production do not change
over time and that technological progress does not occur, if the economy is operating on the PPF,
production of guns would need to be sacrificed to produce more butter.[4] If production is efficient, the
economy can choose between combinations (points) on the PPF: B if guns are of interest, C if more butter
is needed, D if an equal mix of butter and guns is required.[4]

In the PPF, all points on the curve are points of maximum productive efficiency (no more output of any
good can be achieved from the given inputs without sacrificing output of some good); all points inside the
frontier (such as A) can be produced but are productively inefficient; all points outside the curve (such as X)
cannot be produced with the given, existing resources.[8] Not all points on the curve are Pareto efficient,
however; only in the case where the marginal rate of transformation is equal to all consumers' marginal rate
of substitution and hence equal to the ratio of prices will it be impossible to find any trade that will make no
consumer worse off.[9]

Any point that lies either on the production possibilities curve or to the left of it is said to be an attainable
point: it can be produced with currently available resources. Points that lie to the right of the production
possibilities curve are said to be unattainable because they cannot be produced using currently available
resources. Points that lie strictly to the left of the curve are said to be inefficient, because existing resources
would allow for production of more of at least one good without sacrificing the production of any other
good. An efficient point is one that lies on the production possibilities curve. At any such point, more of
one good can be produced only by producing less of the other. [10]

For an extensive discussion of various types of efficiency measures ( Farrell, Hyperbolic, Directional, Cost,
Revenue, Profit, Additive, etc.) and their relationships, see Sickles and Zelenyuk (2019, Chapter 3).

Marginal rate of transformation

The slope of the production–possibility frontier (PPF) at any given

point is called the marginal rate of transformation (MRT). The
slope defines the rate at which production of one good can be
redirected (by reallocation of productive resources) into production
of the other. It is also called the (marginal) "opportunity cost" of a
commodity, that is, it is the opportunity cost of X in terms of Y at
the margin. It measures how much of good Y is given up for one
more unit of good X or vice versa. The shape of a PPF is
commonly drawn as concave to the origin to represent increasing
opportunity cost with increased output of a good. Thus, MRT
increases in absolute size as one moves from the top left of the PPF
to the bottom right of the PPF.[11]
Figure 5: The marginal rate of
transformation increases when the
The marginal rate of transformation can be expressed in terms of
transition is made from AA to BB.
either commodity. The marginal opportunity costs of guns in terms
of butter is simply the reciprocal of the marginal opportunity cost of
butter in terms of guns. If, for example, the (absolute) slope at point
BB in the diagram is equal to 2, to produce one more packet of butter, the production of 2 guns must be
sacrificed. If at AA, the marginal opportunity cost of butter in terms of guns is equal to 0.25, the sacrifice of
one gun could produce four packets of butter, and the opportunity cost of guns in terms of butter is 4.

Shape
The production-possibility frontier can be constructed from the contract curve in an Edgeworth production
box diagram of factor intensity.[12] The example used above (which demonstrates increasing opportunity
costs, with a curve concave to the origin) is the most common form of PPF.[13] It represents a disparity, in
the factor intensities and technologies of the two production sectors. That is, as an economy specializes
more and more into one product (such as moving from point B to point D), the opportunity cost of
producing that product increases, because we are using more and more resources that are less efficient in
producing it. With increasing production of butter, workers from the gun industry will move to it. At first,
the least qualified (or most general) gun workers will be transferred into making more butter, and moving
these workers has little impact on the opportunity cost of increasing butter production: the loss in gun
production will be small. However, the cost of producing successive units of butter will increase as
resources that are more and more specialized in gun production are moved into the butter industry.[14]

If opportunity costs are constant, a straight-line (linear) PPF is produced.[15] This case reflects a situation
where resources are not specialised and can be substituted for each other with no added cost.[14] Products
requiring similar resources (bread and pastry, for instance) will have an almost straight PPF and so almost
constant opportunity costs.[14] More specifically, with constant returns to scale, there are two opportunities
for a linear PPF: if there was only one factor of production to consider or if the factor intensity ratios in the
two sectors were constant at all points on the production-possibilities curve. With varying returns to scale,
however, it may not be entirely linear in either case.[16]

With economies of scale, the PPF would curve inward, with the opportunity cost of one good falling as
more of it is produced. Specialization in producing successive units of a good determines its opportunity
cost (say from mass production methods or specialization of labor).[17]

Figure 6a: Standard PPF: increasing Figure 6b: Straight line PPF: constant
opportunity cost opportunity cost

Figure 6c: inverted PPF: decreasing

opportunity cost

Opportunity cost
From a starting point on the frontier, if there is no increase in productive resources, increasing the
production of a first good entails decreasing the production of a second, because resources must be
transferred to the first and away from the second. Points along the curve describe the tradeoff between the
goods. The sacrifice in the production of the second good is called the opportunity cost (because increasing
production of the first good entails losing the opportunity to produce some amount of the second).
Opportunity cost is measured in the number of units of the second good forgone for one or more units of
the first good.[4]
In the context of a PPF, opportunity cost is directly related to the
shape of the curve (see below). If the shape of the PPF curve is a
straight-line, the opportunity cost is constant as the production of
different goods is changing. But, opportunity cost usually will vary
depending on the start and end points. In Figure 7, producing 10
more packets of butter, at a low level of butter production, costs the
loss of 5 guns (shown as a movement from A to B). At point C, the
economy is already close to its maximum potential butter output. To
produce 10 more packets of butter, 50 guns must be sacrificed (as
with a movement from C to D). The ratio of gains to losses is
determined by the marginal rate of transformation.'

Notes Figure 7: Increasing butter from A to

B carries little opportunity cost, but
1. Sickles, R., & Zelenyuk, V. (2019). Measurement of going from C to D the cost is great.
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References
Economics portal

Production Possibility Curve (PPC) (https://www.eduzip.com/learn/11th-class-cbse/economi

cs/introduction-to-microeconomics/production-possibility-curve-ppc)
HTML5 Interactive on Production Possibilities Curve (http://iwant2study.org/ospsg/index.ph
p/interactive-resources/others/economics/835-productionpossibilitycurve)
Nicholson, Walter (2005). Microeconomic Theory: Basic Principles and Extensions (https://ar
chive.org/details/microeconomicthe00nich_852). Thomson/South-western. pp. 339 (https://ar
chive.org/details/microeconomicthe00nich_852/page/n330)–345. ISBN 0-324-27086-0.
Samuelson, Paul A. (1967). "Summary on Factor-Price Equalization". International
Economic Review. International Economic Review, Vol. 8, No. 3. 8 (3): 286–295.
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stor.org/stable/2525536).
Samuelson, Paul A. (1962). "The Gains from International Trade Once Again". Economic
Journal. The Economic Journal, Vol. 72, No. 288. 72 (288): 820–829. doi:10.2307/2228353
(https://doi.org/10.2307%2F2228353). JSTOR 2228353 (https://www.jstor.org/stable/222835
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 Samuelson, Paul A. (1971). "Ohlin Was Right". Swedish Journal of Economics. 73 (4): 365–
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Practice. Cambridge: Cambridge University Press.
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