What is the Production Possibilities Frontier (PPF)?

//What is the Production Possibilities Frontier (PPF)?
What is the Production Possibilities Frontier (PPF)? 2017-10-09T07:26:40+00:00

Definition: Production possibilities frontier (PPF), also known as production possibility curve, indicates the maximum output combinations of two goods or services an economy can achieve by fully using all available resources efficiently.

What Does Production Possibilities Frontier Mean?

What is the definition of production possibilities frontier? The production possibility frontier indicates the maximum production possibilities of two goods or services, assuming a fixed level of technology and only one choice between the two.

Producing one good always creates a trade off over producing another good. In other words, if more of good A is produced, less of good B can be produced given the resources and production technology remain constant.

Hence, the production of one good or service increases when the production of the other good or service decreases. The PPF measures the efficiency in which the two goods or services are produced together. In that way, it helps managers to determine the most beneficial mix of commodities for the business.

Let’s look at an example.

Example

Typically, opportunity cost occurs when a manager chooses between two alternative ways of allocating business resources. In other words, if one action is chosen, the other action is foregone or given up. There is a trade off. Hence, the production possibility frontier provides an accurate tool to illustrate the effects of making an economic choice.

At any given point of a PPF, the company produces at maximum efficiency by fully using its resources. At an economic level, this is known as the Pareto efficiency, which suggests that, when allocating resources, the choice of one will worse off the other. Also, any point inside the PPF is inefficient because at that point the output is greater than the output that the existing resources can produce.

For example, a country produces pizza and sugar. If the country decides to ramp up its sugar production, using the existing fixed resources, it has to lower its pizza production. Hence, at points A, B, and C, the economy achieves the maximum production possibilities between pizza and sugar. Point D is inside the PPF line and is inefficient because all the resources are not being used properly. Point E is simply beyond the amount of production attainable with the current level of resources.

Production Possibilities Frontier Example

Summary Definition

Define Production Possibilities Frontier: PPF means a graphical representation of the possible production combinations a company could produce if it used all of its resources to produce only two goods or services.