Production Possibility Frontier

This is a simple representation of the goods that an economy can produce.

In order to draw it on paper, in two dimensions, we assume there are only two goods.

The core idea here is that we have a fixed amount of resources, and we can shift those recources from making one good to making the other good.

To make it simple, we will assume that the key resource is labor.

Start with the country of Utopia.  Utopia has a population of 1,000 workers.  There are two goods, motor cars and chocolate bars.

It takes 100 workers to build a motor car in one day, and 1 worker to make a bar of chocolate in one day.

This lets us make up a little table of production, as we move workers from one industry to the other:

 Workers in car industry Workers in chocolate industry Output of cars per day Output of chocolate per day 1000 0 10 0 900 100 9 100 800 200 8 200 700 300 7 300 600 400 6 400 500 500 5 500 400 600 4 600 300 700 3 700 200 800 2 800 100 900 1 900 0 1000 0 1000

This then gives us a series of combinations of cars and chocolate that are possible if we use all our workers.

But wait.  We don't have to use all our workers.  For example

 Workers in car industry Workers in chocolate industry Output of cars per day Output of chocolate per day 300 300 3 300

is entirely possible, with the other 400 workers sitting around idle.

So the Production possibility "frontier" is literally that: a border between the combinations that are possible and the combinations that are impossible.

All the combinations that are on the PPF are possible if we use all our workers.  All the ones inside it (the green area) are possible of we do not use all our workers.  All the combinations outside our PPF (white area) are impossible for our little country.

A note on the shape of the PPF:  If all the resources (workers, in this case) are identical, and output responds very directly to the number of workers, as in this example, you get a straight-line PPF.   Under other assumptions the PPF may not be straight. But for most of our examples we will stick to a simple straight-line PPF.