31 Reading: The Production Possibilities Frontier
Overview
Let’s review the production possibilities frontier and focus more specifically on the shape of the curve.
As a reminder, the production possibilities frontier (PPF) is an economic model that shows the possible combinations of two products or services that could potentially be produced by a society. Remember, an economic model is a simplified version of reality that allows us to observe, understand, and make predictions about economic behavior. With the PPF model, we’re focused on a society’s production choices and trade-offs.
Because society has limited resources (e.g., labor, land, capital, and raw materials) at any given moment, there’s a limit to the quantities of goods and services it can produce. Suppose a society desires two products: health care and education. This situation is illustrated by the production possibilities frontier in Figure 1.
Figure 1 shows a trade-off between devoting resources to health care and to education. Health care is shown on the vertical axis, and education is shown on the horizontal axis. If the society were to allocate all of its resources to health care, it could produce at point A. But it would not have any resources to produce education. If it were to allocate all of its resources to education, it could produce at point F. Alternatively, the society could choose to produce any combination of health care and education shown on the production possibilities frontier.
Suppose society has chosen to operate at point B, and it’s considering producing more education. Because the PPF is downward sloping from left to right, the only way society can obtain more education is by giving up some health care. That’s the trade-off that society faces. Suppose it considers moving from point B to point C. What would be the opportunity cost for the additional education? The opportunity cost would be the health care that society has to give up.
Do you remember Charlie choosing combinations of burgers and bus tickets within his budget constraint? In effect, the production possibilities frontier plays the same role for society as the budget constraint plays for Charlie. Society can choose any combination of the two goods on or inside the PPF, but it doesn’t have enough resources to produce outside the PPF. Just as with Charlie’s budget constraint, the opportunity cost is shown by the slope of the production possibilities frontier.
Difference between Budget Constraint and PPF
There are differences between a budget constraint and a production possibilities frontier. A budget constraint model shows the purchase choices that an individual or society can make given a specific budget and specific purchase prices. The production possibilities frontier shows the possible combinations of two products or services that could potentially be produced by a society. Budgets and prices are more precise. If you think about it, a society’s “possibilities of production” are vastly more compli