20 The Production Possibilities Frontier
What you’ll learn to do: illustrate society’s trade-offs by using a production possibilities frontier (or curve)
In the previous sections of this module, we explored how individuals make choices about how to spend their budgets. In this section, we expand that idea to look at how societies make choices about what goods and services to produce.
During the 1960s, President Lyndon Johnson attempted two major, costly initiatives: launching the “War on Poverty,” and expanding the Vietnam War. The results were not as nice as he expected because he was unable to completely tackle both issues, and he ignored what economists call the production possibilities frontier (also called the production possibilities curve). In brief, societies have limited resources so they face trade-offs, just as individuals do.
The production possibilities frontier (or PPF, for short) is a model of the economy as a whole, which shows all possible combinations of goods products or services that a society could produce, given the resources it has available.
Learning Objectives
- Explain the production possibilities frontier
Just as individuals cannot have everything they want and must instead make choices, society as a whole cannot have everything it might want, either. Economists use a model called the production possibilities frontier (PPF) to explain the constraints society faces in deciding what to produce.
As you read this section, you will see parallels between individual choice and societal choice. There are more similarities than differences, so for now focus on the similarities.
While individuals face budget and time constraints, societies face the constraint of limited resources (e.g. labor, land, capital, raw materials, etc.). Because at any given moment, society has limited resources, it follows that there’s a limit to the quantities of goods and services it can produce. In other words, the products are limited because the resources are limited.
Suppose a society desires two products: health care and education. This situation is illustrated by the production possibilities frontier in Figure 1.
Health care is shown on the vertical (or y) axis, and education is shown on the horizontal (or x) axis. Where does the PPF come from? It comes from the production processes for producing the two goods, and the limited amounts of resources available to use for that purpose. For example, suppose one teacher can teach 25 students in school. If society has a total of 10 teachers, education can be provided to a maximum of 250 students. We would say one teacher could “produce” 25 students worth of education using the education processes available.
Suppose a society allocated all of its resources to producing health care. That is certainly one possible way of allocating a society’s resources, but it would mean there would be no resources left for education. This choice is shown in Figure 1 at point A. Similarly, the society could allocate all o