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Production possibility frontiers

a) The uses of production possibility frontiers

The PPF represents the maximum possible combination of capital and consumer goods that can be produced in an economy given its resources (KEY DEFINITION). 

This is likely the first time you will have encountered a graph in economics, and this particular one can be used in relation to key economic concepts such as opportunity cost, economic growth and productivity (this means it's important to learn it well).

The diagram is curved due to the law of diminishing marginal returns. This means that at certain points on the curve, the trade-off between capital and consumer goods is different. Essentially, if a country has 50 capital good producing factories and 50 consumer good producing factories, it is easier to change some of the factories to produce other goods rather than changing all of them to produce one. This makes the efficiency of having all capital or all consumer goods lower than having a combination of the two, curving the PPF outwards.


The PPF's uses are as follows:

The maximum productive potential of an economy

This is the main use for the PPF. Any point on the curve shows where an economy can produce at maximum efficiency with it's current resources (points A and B).

Opportunity cost

REMEMBER THIS DEFINITION. Using this example diagram, we can calculate the opportunity cost for producing capital and/or consumer goods at certain points on the curve. Because the graph has a curved shape, the opportunity cost will be different in different places.

The opportunity cost of moving from A to B is 30 capital goods in order to produce 40 extra consumer goods. This is because in order to make more of one good, a trade-off occurs whereby you produce less of one to produce more of the other.

Similarly, the opportunity cost of producing 100 capital goods is 100 consumer goods. This large opportunity cost makes it unlikely for any economy to produce at either extreme on the curve. 

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If the law of diminishing marginal returns does not apply, then the curve will be a straight line. If this is the case, we can calculate the opportunity cost at any point on the curve. The cost for producing 5 capital goods is 8 consumer goods; this is shown in a calculation as 80/50 = 1.6. Similarly, the cost for producing 8 consumer goods is 5 capital goods, making the opportunity cost calculation 50/80 = 0.625.

Economic growth or decline

If the curve shifts outwards, then the economy has grown. Because the PPF represents the maximum productive potential of an economy, if it shifts out then this maximum level has increased, representing economic growth (or in macro terms, a rise in GDP).

If the curve shifts inwards, then applying the same logic as above, the economy has declined.

Efficient or inefficient allocation of resources

Point C on the curve shows what has been explained above: when an economy is producing at maximum efficiency. However this is almost never achieved in the real world, with every country having unemployed resources, most notably labour (known as the unemployed). All countries produce within the curve at points such as point D, as they are not fully maximising output.

Possible and unobtainable production

Any point on or within the curve is possible to produce at with an economy's current resources. Point E represents unobtainable production as it is impossible to produce here using the resources that are currently available.

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Points A and B represent production of only capital goods or only consumer goods respectively. As explained above, it is unlikely for any economy to produce here due to the law of diminishing marginal returns and the fact that there must be a balance between the production of both goods in order to keep all economic agents satisfied.

b) The difference between movements and shifts

A movement only occurs when there is a change in the combination of capital and consumer goods produced.

A shift shows that there has been a change in the productive potential of the economy. A shift out happens when there is an increase in the quantity and/or quality of one of the factors of production. A shift in happens when these factors decline.

c) Capital and consumer goods

Capital goods are used to produce or aid the production of consumer goods (think about anything used in a factory).

Consumer goods are demanded and purchased by consumers (think about anything sold in a supermarket).

Some goods can be both, such as computers. According to the UK's Capital Allowance claim for businesses, company vehicles are classed as 'plant and machinery' for corporation tax purposes. This means that certain cars and vans can be thought of as both capital and consumer goods.

To help revise this, click the button for my condensed flashcards!

EXAM TIP: PPF's are usually only brought up in section A of the exam. However, I have seen them used in longer answer questions before. This is an important topic to learn well just in case you have to write a lot about it. ALSO, only EVER use these graphs in microeconomics, otherwise you will be marked down for it.

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