Production Possibilities Frontier PPF Production Possibilities Frontier PPF

Production Possibilities Frontier PPF

Production Possibilities Frontier (PPF) A. PPF is a graphical/visual way to show opportunity cost. B. a set of points that shows all possible combinations of production between two goods, provided a given amount of resources. C. PPF also shows an economy’s maximum efficiency of production of goods.

D. Assumptions about the company: a. Technology is fixed. b. Resources are fixed. c. Resources are used efficiently. E. Example: You own a paper company and it can only produce paper plates and napkins. a. Problem: raw materials (paper) are scarce. You have to allocate your plastic making capabilities to produce both.

Paper PPF 16 14 Paper Plates 12 10 8 6 4 2 0 0 5 10 15 Napkins 20 25

Efficiency, Underutilization, and Unattainable F. Efficient – using all resources to maximize productivity a. Where: Any point on the line b. This is perfect. Where you want to perform G. Inefficient/Underutilized –not using your resources efficiently in order to maximize productivity a. Where: any point below the efficient line, below the curve b. The company is doing something wrong 1. Lazy workers, stalled machines…

H. Unattainable- a production point that is not currently possible. a. Currently, the company is working at its highest potential, they cannot reach beyond the curve. b. Where: any point beyond or above the line c. How/when can they reach this point? 1. It can happen in the future, with a change in technology, processes of production, or an increase in raw materials

Increasing Costs I. Increasing costs – the cost of increasing paper plate production is napkins. a. Every time you make more paper plates you are decreasing the amount of napkins that you can make. The opportunity cost is napkins.