Lecture-03

Production possibilities frontier(PPF) & Opportunity Cost

Nazrul Islam
Lerturer, Dept. Of Humanities
Rajshahi University of Engineering & Technology

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 Production Possibilities Frontier (PPF)
 What is Production Possibilities Frontier (PPF)?
 Production Possibilities Frontier (PPF) shows the maximum amounts of production that can
be obtained by an economy, given its technological knowledge and quantity of inputs
available.
 As resources are limited, if we want to produce more of one good then we may have to
produce less of another good. That is we are facing a tradeoff.

 Drawing of PPF:

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 Production Possibilities Frontier (PPF)/(Contd…)

 Points on the PPF and inside the PPF are attainable.

 Points outside the PPF are unattainable because we have scarcity problem.
(limited resources).
 Points on the PPF shows production efficiency. Then what is production efficiency?

 Production efficiency: when we can produce goods and services at the lowest
possible cost, we have production efficiency.

 Actually production efficiency refers to a situation in which an economy can not

produce more of one good without producing less of another good; this implies
that the economy is on its PPF.
 Production efficiency can be shown by all the points on the PPF curve. When we
are on the PPF, producing more of one good, we have to give up production of
another good.
 At points inside the PPF, production is inefficient because we are giving up more
than necessary of one good to produce a given quantity of the other good.

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 Production Possibilities Frontier (Contd).
 For example, at point Z in Figure, we produce 3 million pizzas and 5 million cans of
cola, but we have enough resources to produce 3 million pizzas and 9 million cans
of cola.
 So at point Z, (5 Cola+ 3 Pizza) & at point E, (5 Cola+ 4 Pizza). At both points we can
produce. That is both points are attainable but production efficiency occurs only at
point E.

 At point Z, pizzas cost more cola than necessary. Pizza costs the lowest possible
cost of production at E. (producing at the points on the PPF). Only when we
produce on the PPF do we incur the lowest possible cost of production.

 Production inside the PPF is inefficient because resources are either unused or
misallocated or both.
 Resources are unused when they are idle but could be working. For example, we
might leave some of the factories idle or some workers unemployed.

 Resources are misallocated when they are assigned to tasks for which they are not
the best match. For example, we might assign skilled pizza chefs to work in a cola
factory and skilled cola workers to cook pizza in a pizzeria.

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 Production Possibilities Frontier (Contd).

 Home Work: From the following table draw a PPF.

Possibilities Rice Wheat

A 0 150
B 10 140
C 20 120
D 30 90
E 40 50
F 50 0

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 Opportunity Cost

 What is Opportunity Cost?

 Due to production efficiency a choice along the PPF involves a tradeoff; that is whether you
are producing jute or rice or producing both? If produce both then how much of the both
goods?

 What is tradeoff?
 A constraint that involves giving up one thing to get something else.

 When we have to give up the highest valued alternative to get something, the lost one is
called opportunity cost of the availed one.

 For example, to produce more pizzas we must produce less cola. The opportunity cost of
producing an additional pizza is the cola we must forgo.

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 Opportunity Cost (example)…(contd.)

 Figure of Opportunity cost:

 If we move from point C to D,

we get additional 1 pizza (3-2)
but lost 3 Cola (9-12)

 As we get one more pizza , cost of one pizza is 3 cans of cola. So , opportunity cost of
one pizza is 3 can of cola.

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 Measuring Opportunity Cost

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 Measuring opportunity cost (contd.)

 Does opportunity cost remain same along a PPF?

 The answer is no. opportunity cost remains
same along a straight line PPF but varies along
a bowed out PPF (bending PPF curve) at
different points.

 Here we see that as production increases,

opportunity cost increases. The
outward-bowed shape of the PPF shows
increasing opportunity cost.

# Slope between points A & B :

 Here, large quantiy of cola and small quantity of pizza produced. The frontier has a gentle
shape.
 Here, an increase in the quantity of pizzas costs a small decrease in the quantity of cola. So
opportunity cost of a pizza is a small quantity of cola.

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 Measuring opportunity cost (contd.)

# Slope between E and F(large quantity of pizza and small quantity of cola produced):

 Here the PPF is steep. A given increase in the quantity of pizza costs a large
decrease in the quantity of cola. So the opportunity cost of pizza is a large quantity
of cola.

 The PPF is bowed outward because resources are not equally produced in all
activities.

 For example-people with many years of experience working for cola are good at
producing cola but not very good at making pizzas. If some of these people switch
from cola to produce pizzas, we get a small increase in the quantity of pizzas but a
large decrease in the quantity of cola.

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 Measuring opportunity cost (contd.)

 Every points on PPF shows production efficiency, but which point is the best?

 The point on the PPF at which goods and services are produced in the quantities
that provide the greatest possible benefit is the best.

 Allocative efficiency occurs when goods and services are produced at the lowest
possible cost and in the quantities that provide the greatest possible benefit.

 At the allocative efficient point, we can not produce more of any good without
giving up some of another good that we value more highly.

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 Thank You!

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