Production Possibility Frontier PPF

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Production possibility frontier (PPF) is the curve which joins all the points showing the maximum amount of goods and services which the country can produce in a given time with limited resources, given a specific state of technology. A production possibilities frontier represents the boundary or frontier of the economy’s production capabilities. That’s why it’s termed a production possibilities frontier (or PPF). As a frontier, it is the maximum production possible given existing (fixed) resources and technology. Table: Choice & Opportunity cost revisited: The law of increasing opportunity cost.

Rice CottonOpportunity Cost

A

0

10

B

1

9

1

C

2

7

2

D

3

4

3

E

4

0

4

 

This table represents the alternative combinations of rice and cotton for a hypothetical economy which is producing only 2 goods. At point A only cotton is produced, rice is not produced. In order to produce one unit of rice, we have to give up one unit of cotton (10-9=1). So the opportunity cost is 1 at point B. further in order to produce next unit of rice, we have to give up 2 units of cotton (9-7=2). So the opportunity cost of next additional unit is 2 and so on. This table shows that opportunity cost is increasing with each additional unit. It means we have to give up higher and higher units of cotton in order to produce each additional unit of rice. This is the principle of increasing opportunity cost. If opportunity cost decreases with each additional unit produced, then it is the principle of decreasing opportunity cost. And if opportunity cost remains constant with each extra unit produced, it is the principle of constant opportunity cost. The law of increasing opportunity cost is what gives the curve its distinctive convex shape. Points on the PPF show the efficient utilization of resources. Points inside the PPF show inefficient use of resources.Production possibility frontier

Points outside the PPF show that some of the resources are unemployed or not utilized. PPF curve shifts upward due to technological advancements. If there is improvement in technology to produce the output, then total output will increase and PPF will shift outward.

Source: virtual university

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