Overview
This lecture explains production possibility frontiers (PPFs) as tools to illustrate scarcity, choice, opportunity cost, efficiency, and production increases in economics, both at firm and economy-wide levels.
What is a Production Possibility Frontier (PPF)?
- A PPF shows the maximum possible production of two goods or services with a given set of resources.
- On a micro level, a PPF represents combinations of two goods a firm can produce.
- On a macro level, it shows combinations of all goods and services an economy can produce.
Opportunity Cost on the PPF
- The PPF demonstrates opportunity cost: increasing one good requires sacrificing production of another.
- A concave PPF shows increasing opportunity cost—the more you make of one item, the more you give up of the other.
- A linear PPF shows constant opportunity cost where each extra unit of one good always costs the same amount of the other.
Types of Efficiency on the PPF
- Productive efficiency: Any point on the curve uses all resources fully; no waste.
- Productive inefficiency: Any point inside the curve means resources are underused (waste or unemployment).
- Allocative efficiency: Production matches what consumers want, but PPFs do not show this directly.
- Pareto efficiency: Any point on the curve means improving one good requires sacrificing another; cannot make someone better off without making someone else worse off.
Increasing Production on the PPF
- Move from inside the curve to the curve by better using idle resources.
- Reallocate resources along the curve to focus on producing more of one good.
- Shift the entire PPF outward by increasing the quantity or quality of resources (labor, capital, land, enterprise).
- The PPF can shift unevenly if improvements benefit only one product.
Key Terms & Definitions
- Production Possibility Frontier (PPF) — A curve showing maximum attainable combinations of two goods/services with given resources.
- Opportunity Cost — The value of what is forgone to produce more of another good.
- Productive Efficiency — Using all factors of production fully, producing on the PPF.
- Productive Inefficiency — Underusing resources, producing inside the PPF.
- Allocative Efficiency — Producing the mix of goods most desired by society.
- Pareto Efficiency — No one can be made better off without making someone else worse off at points on the PPF.
Action Items / Next Steps
- Review diagrams of both micro and macro PPFs with labeled axes and points.
- Practice identifying opportunity cost and efficiency on sample PPFs.
- Prepare for the next lecture on related economic concepts.