PPF (Production Possibility Frontier)

A PPF shows the potential ability to produce 2 goods and can be used to show how resources and the factors of production are allocated. They also help us to analyse the trade-offs and opportunity costs we must make as a result of scarcity. They show us the possible maximum combination of goods/services that can be produced using the resources that we have available. On the x-axis there could be capital goods and on the y-axis consumer goods, alternatively it could be PCs on the x-axis and TVs on the y-axis.

The graph to the left is an example of a PPF and shows the opportunity costs between producing goods and services. Click here for more detail on this.

A country producing on the curve/frontier is working efficiently (productive efficiency), no more output can be obtained unless there is an increase in inputs (see below about expanding the PPF). This means that all factors of production (land, labour and capital) are being employed. So this means that unemployment will be very low (not necessarily zero as we will see in macroeconomics), machines and factories wont be idle and raw materials (land) are being utilised. 

Productive efficiency doesn't necessarily mean allocatively efficient. This means that resources may be going to the wrong group of people or are being wasted; but as long as all factors of production are utilised then the economy is said to be productively efficient.

For a PPF curve to shift outwards (more output can be obtained through an increase in inputs) economic growth needs to occur. For there to be a rightward shift then the amount of the factors of production or quality needs to increase. This could mean that labour increases through migration into a country, as there would be more labour (although a baby boom would have this effect in the long run it wouldn't be the case in the short run). For land to increase there would have to be a discovery of more resources; for example discovering a new oilfield or coal mine. For capital to increase investment would have to be partaken (the opportunity cost being the production of consumer goods). Also technology can lead to a rightward shift in the PPF curve. For example computers have allowed labour to increase production and crops have been genetically modified leading to a rightward shift of the curve.

It is also possible for a PPF curve to shift inwards (leftwards) meaning an economy can produce less. This could happen if there was mass immigration from a country or if there was a natural disaster (earthquake, tsunami, etc). A natural disaster may lead to a reduction in the workforce (through fatalities or casualties) and thus less labour, it may destroy land or it may result in the destruction of capital goods if machines and factories are destroyed. All of these factors would cause a leftward shift of the PPF curve.

If a point is given that is outside the PPF curve then it is unattainable. With current inputs (factors of production) the economy will not be able to produce at that level; see the example below.

If the economy is working at a point within the PPF curve then it is working inefficiently. This means that not all resources are being used fully; therefore there may be unemployment or idle machines (capital). The UK (and most Western economies) were working inefficiently, within their PPF, during the recession of 2008.