Production Possibility Frontier (Section 1.

3 up to test
your understanding 1.9)

Preliminary: Reminder of what a model is in

economics?
When attempting to gain an understanding of an incredibly
complicated situation, economists often try to simplify the
situation by removing unnecessary and distracting things to
make the world “workable”. When this is done we end up
with ‘a model’: something that is not “real” and it often
looks like a ridiculous description - but it may allow us to
make some truthful conclusions. You have already looked
at a model earlier in these notes. It might be a good idea to
just recap this with your teacher so you are clear about the
idea of a model..

Production Possibility Model

Consider a hypothetical economy with the following
simplifying assumptions (i.e it is a “model”):-
1. it can devote its scarce resources to the production of
either of two goods only: Necessities or Luxuries;
2. all of its resources are fully employed being used to their
highest productivity (efficiency);
3. all of its resources are in fixed supply (i.e we can’t have
more resources being discovered or brought into the
economy);
4. the level of technology remains constant.

Below is a table with a number of possible combinations of

these commodities that can be produced depending on how
resources are divided or allocated between the production
of each commodity:-

Product (units Combination or possible Resource

per year) Allocation
A B C D E F
Necessities 15 14 12 9 5 0
Luxuries 0 1 2 3 4 5

Consider the table:-

 if all resources are devoted to the production of luxuries

there is a maximum amount of luxuries that can be
produced per year: 5 Luxuries;
 if all resources are devoted to the production of
necessities, there is a maximum amount of necessities
that can be produced per year: 15 units of Necessities.
 this society can “transform” luxuries into necessities -
not “physically” but by diverting resources away from
the production of luxuries toward the production of
necessities.
 We can use the table above to calculate the “opportunity
cost” of producing each commodity. Imagine that the
society is producing at combination B. At this
combination it is producing 1 unit of Luxuries and 14
units of Necessities. Imagine that it wants to produce 2
units of Luxuries. To do this it will have to reallocate its
resources to Combination C because its resources are
fully employed at present. At this point it can only
produce 12 units of Necessities. To produce the extra
 unit of Luxuries it has had to give up 2 units of
Necessities. Therefore the opportunity cost of 1 unit of
Luxuries is 2 units of Necessities.
 The table can be represented in graphical form as
follows….

This is a Production Possibility Curve. It

diagrammatically illustrates the opportunity cost
involved in producing each commodity:-
[refer to “PPF1” ]
 Note the way that the PPF slopes downward to reflect the
fact that you ‘give up’ one commodity to get more of the
other
 Consider a move from resource allocation F to allocation
D. This causes a rise in military production by 9 units
and a fall in civilian production by 2 units. So the
opportunity cost of producing the first 9 units of
necessities is 2 units of luxuries.
 Note the way that the PPF is concave. This represents
increasing opportunity cost – listen carefully as your
teacher explains why …
 Sometimes PPF are linear (your teacher may illustrate)
this shows constant opportunity cost (see Figure 1.2 on
page 17)
 It’s a production possibility frontier because it is a
“limit” of production. All points on the frontier are
possible combinations of production assuming all
resources are being employed. We can produce at point
U - within the frontier (see figure 1.1 on page 16 also) -
but this means that we are not fully employing our
resources. If we were to move from U to certain points
on the PPF (your teacher will show you) we can gain
without any opportunity cost!
 We can’t produce at point X because we simply don’t
have the resources to allow this. If people were so
confident that they demanded as much as Point X
indicates then this is likely to result in inflation.
 It is impossible to say which is “the best” point on the
PPF because this depends on the tastes and preferences
of the society.
 Imagine a PPF of a country that produces either capital
goods or consumption goods. As we have stated
previously, if we produce capital goods we cannot
presently consume (that’s the opportunity cost!).
However “capital accumulation” means that, in the
future our resources can be used to produce more goods
and services. What do you think this will do to our
production possibility curve?

Let’s look at the documents “PPF2” and “PPF3” and see if

you can understand the implications of the information they
have given you to help understand the PPFs.

Let us consolidate the PPF questions by reading the Section

of your textbook about PPFs, then attempting test your
understanding 1.9. Then some exercises that your teacher
will give you access to.

Firstly, just peruse this additional PowerPoint example for

enhanced understanding (it doesn’t really add anything)

Then A ‘fill in the blanks’ exercise (no solution available

but you can go through this with your teacher)

A VLE PPF Explainer with examples with accompanying

questions followed by solutions

Lesson 2 supplement PPF Questions from Dixon and

accompanying solutions

And finally, this document that summarises most of

what you’ve learned and also includes useful
exercises at the end (including question from the
TCE workbook)