Production Possibility Curve (PPC)/Frontier (PPF)

Ø What is the 'Production Possibility Curve(PPC)/Frontier(PPF)'?

 

The production possibility frontier (PPF) is a curve depicting all maximum output possibilities for two goods, given a set of inputs consisting of resources and other factors. The PPF assumes that all inputs are used efficiently.

Factors such as labor, capital and technology, among others, will affect the resources available, which will dictate where the production possibility frontier lies. The PPF is also known as the production possibility curve or the transformation curve.

Ø Usefulness of PPC as an economic tool:

A Production Possibility Cruve (PPC) is a graph that shows the maximum attainable combinations of output that can be produced in an economy within a specified period of time. The usefulness of an economic tool is dependent on the extent to which a certain economic model reflects reality, and its relevance to decision making. While there are limitations of the PPC, I believe that, overall, it is a very useful economic tool.

Firstly, the PPC is an oversimplified model that only reflects the trade-off between two goods, when the real world is a lot more complex than this. In any economy, with other facts and goods in place, the pursuit of one type of good often comes at the opportunity cost of many other types of good – rather than just one other type, as the curve suggests. 

Secondly, the PPC also makes an assumption that there is a fixed amount of resources, and production beyond the curve is “unattainable”. However, we understand by the law of comparative advantage and the possibility of trade that an economy can indeed produce beyond the curve. Since trade is evident in the real world.

Ø Merits /Advantages of the PPC:

·        The PPC is used as a simple economic model for understanding the concepts of scarcity and efficiency. Production within the PPC is inefficient, for not all the resources are utilised; production out of the PPC is “unattainable” within the limitations of the economy. 

·        The PPC also reflects the trade off and opportunity cost. From the shape of the graph, it is possible to tell how much one good has to be sacrificed in order to produce more goods of another.

·        By plotting the PPC, it is possible to observe real economic growth. When there is an outward shift of the PPC, it is possible to conclude that a country’s capacity to produce has increased, which is real economic growth. 

·         The shape of the PPC also reflects the suitability of production with the resources available. Very often, a skewed PPC hints that an economy is more capable of producing one type of good than another.