Hence, at this point the opportunity cost of 600 burgers is 200 hot dogs. Similarly, to increase production of burgers from 0 to 600, the economy has to reduce production of hot dogs from 1000 to 800. Thus, the opportunity cost of these 100 burgers is exactly 100 hot dogs. Or in other words, the PPF shows, how much of good A must be given up in order to get more of good B and vice versa.įor example, if we take another look at the illustration above, we can see that the economy has to give up 100 burgers if it wants to increase production of hot dogs from 700 to 800. It shows the trade-offs companies or individuals face when they have to decide how to allocate their limited resources between two alternatives. Production Possibility Frontier and Opportunity CostsĪs mentioned above, the production possibility frontier is a beautiful illustration of opportunity costs. Note that the more points we have, the more accurate our PPF will be. If we plot these points in the diagram (see below) and connect them with the x-intersect and y-intersect, we can approximate the full PPF. Alternatively it can also produce 700 burgers and 700 hot dogs (Point B). To draw the production possibility curve, we can plot a few of those combinations in the diagram and simply connect them to get the full PPF.įor example, let’s say our economy can produce 600 burgers and 800 hot dogs (Point A). There are countless combinations of the two goods that can be produced at full capacity. Of course, the economy can also decide to divide its resources between the production of burgers and hot dogs. That is, they indicate the x-intersect and the y-intersect of our curve (see below). These two extremes mark the end points of the production possibility frontier. By contrast, if all resources are dedicated to the production of hot dogs, the economy can produce 1,000 burgers. If all available resources are used to make burgers, the economy can produce a total 900 burgers and 0 hot dogs. the burger and the hot dog industries) together use all the economy’s available factors of production. Let’s imagine an economy that only produces two goods: burgers and hot dogs. The best way to explain how to draw a production possibility frontier is to look at a simple example. So, let’s get started.ĭrawing a Production Possibility Frontier In the following paragraphs we will look at how to draw a production possibility curve, how to interpret it and how it is related to the concept of Pareto efficiency. That is, it shows how much of a good or service must be given up in order to get more of another good or service. The PPF is a great concept because it beautifully illustrates two of the most fundamental economic concepts: trade-offs and opportunity costs. It is also known as the transformation curve or the production possibility curve. The production possibility frontier (PPF) is a graph that shows all maximum combinations of output that an economy can achieve, when available factors of production are used effectively.
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