Explain production possibility frontier or production possibility curve?
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Answer:
A production–possibility frontier (PPF) or production possibility curve (PPC) is a curve which shows various combinations of the amounts of two goods which can be produced with the given resources and technology/a graphic representation showing all the possible options of output for two products that can be produced using all factors of production, where the given resources are fully and efficiently utilized per unit time. A PPF illustrates several economic concepts, such as allocative efficiency, economies of scale, opportunity cost (or marginal rate of transformation), productive efficiency, and scarcity of resources (the fundamental economic problem that all societies face).[1]
This tradeoff is usually considered for an economy, but also applies to each individual, household, and economic organization. One good can only be produced by diverting resources from other goods, and so by producing less of them.
Graphically bounding the production set for fixed input quantities, the PPF curve shows the maximum possible production level of one commodity for any given production level of the other, given the existing state of technology. By doing so, it defines productive efficiency in the context of that production set: a point on the frontier indicates efficient use of the available inputs (such as points B, D and C in the graph), a point beneath the curve (such as A) indicates inefficiency, and a point beyond the curve (such as X) indicates impossibility.
An example PPF with illustrative points marked
PPFs are normally drawn as bulging upwards or outwards from the origin ("concave" when viewed from the origin), but they can be represented as bulging downward (inwards) or linear (straight), depending on a number of assumptions.
An outward shift of the PPC results from growth of the availability of inputs, such as physical capital or labour, or from technological progress in knowledge of how to transform inputs into outputs. Such a shift reflects, for instance, economic growth of an economy already operating at its full productivity (on the PPF), which means that more of both outputs can now be produced during the specified period of time without sacrificing the output of either good. Conversely, the PPF will shift inward if the labour force shrinks, the supply of raw materials is depleted, or a natural disaster decreases the stock of physical capital.
However, most economic contractions reflect not that less can be produced but that the economy has started operating below the frontier, as typically, both labour and physical capital are underemployed, remaining therefore idle.
In microeconomics, the PPF shows the options open to an individual, household, or firm in a too good world. By definition, each point on the curve is productively efficient, but, given the nature of market demand, some points will be more profitable than others. Equilibrium for a firm will be the combination of outputs on the PPF that is most profitable.[2]
From a macroeconomic perspective, the PPF illustrates the production possibilities available to a nation or economy during a given period of time for broad categories of output. It is traditionally used to show the movement between committing all funds to consumption on the y-axis versus investment on the x-axis. However, an economy may achieve productive efficiency without necessarily being allocatively efficient. Market failure (such as imperfect competition or externalities) and some institutions of social decision-making (such as government and tradition) may lead to the wrong combination of goods being produced (hence the wrong mix of resources being allocated between producing the two goods) compared to what consumers would prefer, given what is feasible on the PPF.[3]