Tuesday, October 25, 2011

What is production possibility frontier (PPF)? Explain.


       Production Possibility Frontier (PPF) : In economics, a production possibility frontier (PPF) is a graph that shows the different rates of production of two goods that an individual or group can efficiently produce with limited productive resources. The PPF shows the maximum obtainable amount of one commodity for any given amount of another commodity or composite of all other commodities, given the society's technology and the amount of factors of production available. ... 


            Considering, that in an economy two goods are produced; televisions and computers. When 15 thousand televisions can be produced using the existing resources such as labors, wealth etc, none amount of computers can be produced. So 15 thousand is the maximum number of televisions can be produced. On the other hand, using all the resources, 15 thousand of computers can be produced when no television will be produced. In that way, the economy has to consider each items amount or quantity to get them both with the existing resources.

            A schedule of possibilities is given in the table below―

Alternative production possibilities
Possibilities
Televisions (Thousands)
Computers (Thousands)
A
0
15
B
5
14
C
9
12
D
12
9
E
14
5
F
15
0

            Scarce resources and technology implies that the production of television and computer are limited. As we move from A to F in the above table, we can see that the production of television increases with the decreasing production of computers. Again, if we move from F to A, the production of computers increases.

            Here, the possibility A and F are extremes, as there only one item can be made; at A, it is computer, at F, it is television. In between, B,C,D,E the production of both items combined with amounts.

            By representing the data from the above given table in a graph, we can obtain the production possibility curve or the production possibility frontier.

            The frontier shows the schedule along which the society can choose to substitute televisions for computers. The various combinations are plotted as A,B,C,D,E,F.

            A smooth curve connects all the combinations. This curve is called the production possibility curve or the production possibility frontier. All points on the curve are points of maximum productive efficiency, all points inside the curve are feasible but productive inefficient, all points outside the curve are infeasible for given resources.

            In microeconomics, the PPF shows the options open to an individual for a 2-goods world, but the 2-goods case easily generalizes to the n-goods world that we live in.

            In macroeconomics, the PPF illustrates the production possibilities available to a nation or economy for broad categories of outputs.

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