Production–possibility frontier

Conversely, the PPF will shift inward if the labour force shrinks, the supply of raw materials is depleted, or a natural disaster decreases the stock of physical capital.

However, most economic contractions reflect not that less can be produced but that the economy has started operating below the frontier, as typically, both labour and physical capital are underemployed, remaining therefore idle.

In microeconomics, the PPF shows the options open to an individual, household, or firm in a two-good world.

[2] From a macroeconomic perspective, the PPF illustrates the production possibilities available to a nation or economy during a given period of time for broad categories of output.

It is traditionally used to show the movement between committing all funds to consumption on the y-axis versus investment on the x-axis.

Market failure (such as imperfect competition or externalities) and some institutions of social decision-making (such as government and tradition) may lead to the wrong combination of goods being produced (hence the wrong mix of resources being allocated between producing the two goods) compared to what consumers would prefer, given what is feasible on the PPF.

Conversely, a natural, military or ecological disaster might move the PPF to the left in response to a reduction in an economy's productive capability.

[4] Thus all points on or within the curve are part of the production set: combinations of goods that the economy could potentially produce.

[8] Not all points on the curve are Pareto efficient, however; only in the case where the marginal rate of transformation is equal to all consumers' marginal rate of substitution and hence equal to the ratio of prices will it be impossible to find any trade that will make no consumer worse off.

Points that lie to the right of the production possibilities curve are said to be unattainable because they cannot be produced using currently available resources.

[10] For an extensive discussion of various types of efficiency measures ( Farrell, Hyperbolic, Directional, Cost, Revenue, Profit, Additive, etc.)

If, for example, the (absolute) slope at point BB in the diagram is equal to 2, to produce one more packet of butter, the production of 2 guns must be sacrificed.

The production-possibility frontier can be constructed from the contract curve in an Edgeworth production box diagram of factor intensity.

[12] The example used above (which demonstrates increasing opportunity costs, with a curve concave to the origin) is the most common form of PPF.

[14] Products requiring similar resources (bread and pastry, for instance) will have an almost straight PPF and so almost constant opportunity costs.

[16] With economies of scale, the PPF would curve inward, with the opportunity cost of one good falling as more of it is produced.

If the shape of the PPF curve is a straight-line, the opportunity cost is constant as the production of different goods is changing.

Figure 1: A production possibilities frontier
Figure 2: Unbiased expansion of a production possibility frontier
Figure 3: Production-possibilities frontier for an economy with two products illustrating Pareto efficiency
Figure 4: Frontier points that violate allocative efficiency
Figure 5: The marginal rate of transformation increases when the transition is made from AA to BB .
Figure 7: Increasing butter from A to B carries little opportunity cost, but going from C to D the cost is great.