The production possibilities frontier is a graphical representation of combinations of the amounts of two goods or services that an economy can produce by transferring resources from one good or service to another. It is also referred to as the production possibilities curve.
Economists use the production possibilities frontier to illustrate several fundamental economic concepts, including scarcity, opportunity cost, efficiency, and the relationship between efficiency and economic growth. The curve represents a company or country’s maximum production capacity.
Assume a country called Clean Speech can only produce vats of soap and cell phones. If it dedicates all its resources to soap production, it can produce a maximum of 10,000 vats of soap per day. This scenario is represented as point A on the graph. If the leaders of Clean Speech decide to produce 3,500 cell phones, they must allocate all their resources to cell phone manufacturing, sacrificing soap production. This situation is illustrated as point E on the graph.
Point B on the graph indicates that producing 9,500 vats of soap and 1,500 cell phones is possible. However, suppose the leadership chooses to increase cell phone production to 2,700 units. It would be unable to continue producing 9,500 vats of soap (point F) because it would exceed its capacity. Anything outside the production possibilities frontier is impossible. If Clean Speech wants to produce 2,700 cell phones it would need to shift resources away from soap manufacturing, resulting in a drop in soap production to a maximum of 7,000 vats per day (point C). The opportunity cost of increasing the number of cell phones from 1,500 to 2,700 is 2,500 vats of soap (calculated as 9,500 - 7,000).
Any point inside the frontier represents production levels below capacity, indicating that the company or country could use its resources more efficiently to increase overall production. For instance, at point G, Clean Speech could boost the production of both cell phones and soap without reducing the output of either product. This improvement can occur anywhere within the area labeled BGD.
Understanding the implications of the production possibilities curve allows us to prioritize effectively. When people or resources are directed toward one objective, another objective may be compromised if we are operating on the production possibilities frontier.
For instance, imagine an economy where the most talented individuals pursue banking careers. While the banking industry would undoubtedly flourish, the manufacturing sector might suffer due to a lack of innovation and development. Similarly, if the government hires the brightest scientists to create advanced weapons, these skilled individuals might be discouraged from focusing on developing life-saving drugs.
Ultimately, the decisions made by individuals, companies, and governments significantly impact the potential of each entity.
Production Possibilities Frontier
Comparative Advantage and Specialization
Economics – Managing Our Scarce Resources
Opportunity Cost – The Cost of Every Decision
Fundamental Economic Assumptions
Supply – The Producer’s Perspective
Capital and Consumer Goods – How They Influence Productivity
