Production possibility boundaries (PPB)

The PPB or production possibility frontier (PPF) demonstrates the concepts of choice and opportunity cost.  If we assume that a country can only produce investment and consumer goods, the diagram below shows a PPB that demonstrates a menu of choices for the economy of what it is able to make, for example it could produce:

  • 0A investment goods, or
  • 0B consumer goods, or
  • 0C investment goods and 0D consumer goods.

 

If the economy is producing at any point inside the PPB, such as point X, it is not producing as efficiently as it could, because it could increase production of consumer goods and investment goods with the resources it already has.  It is not possible to produce at any point outside of the PPB.

An economy is able to produce more consumer goods and investment goods by moving from point X to Y (which is on the PPB).

 

If an economy is producing at any point on the PPB, such as Y, it is using all of its resources efficiently.  This means the economy is producing a much as it can given the present levels of technology and productivity, and the amount of factors of production it has.  Any point on the PPB is said to be productively efficient as every firm in the economy is producing at their lowest possible costs.  It a firm was not operating at its lowest possible costs then it would be wasting resources and therefore the economy would not be on the PPB.

 

Any point on the PPB is also allocatively efficient as it is not possible to make somebody better off without making somebody else worse off.

 

Opportunity Cost and the PPB

If that country wanted to increase its production of consumer goods, it would have to sacrifice the production of some investment goods.  Therefore we can say the opportunity cost of producing more consumer goods is investment goods.

The country is presently producing 3 units of consumer goods and 9 units of investment goods.  If it wants to expand output of consumer goods to 4 units the opportunity cost will be 2 units of investment goods.

It is also demonstrate the concept of increasing opportunity costs using a PPB.  This means as a county wants to produce more and more of one good it has to give up increasing amounts of the other good.  The table below provides the figures for an economy; a PPB has been drawn based upon this data.

Assume the economy is presently only producing investment goods.  In order to produce the first unit of consumer goods only 0.1 units has to be given up.  The opportunity cost of the second unit of consumer goods has increased to 0.4.

 

Increasing opportunity costs occur because the factors of production have different properties.

  • Capital, for example, machinery is better equipped to produce one good rather than another one.
  • Land, for example, land differs in quality in different parts of the country.
  • Labour, for example, people have different skills and varying levels of human capital.

 

If the opportunity costs were constant the PPB would be a straight line.  It is because of increasing opportunity costs that the PPB is bowed outwards.

 

SHIFTS OF THE PPB

As you know, a nation is unable to produce outside of the PPB. A nation is able to shift its PPB to the right (so that it can produce a greater amount of goods) in one of two ways:

  • Increasing the quantity of factors of production available for production, for example, increase in the number of workers or factories.
  • Increasing the quality of factors of production available for production

 

An outward shift of the PPB can be shown below:

If the increase in the quality or quantity of factors of production only affected one of the two products, we would see a shift in the PPB as below.

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