production possibility frontier
A production possibility frontier (PPF) shows the combinations of two or more goods that can be produced using all available resources efficiently.
A PPF is normally drawn as concave to the origin since the marginal productivity of allocating extra resources to one particular good may fall. For example in the diagram below, some resources used in the production of motor vehicles may not be suited to producing personal computers.
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Points lying inside the PPF occur when there are unemployed resources or when the economy is not making efficient use of the scarce resources available. Point X is an example of this. We could increase output of both goods by moving towards the production possibility frontier and reaching any of points C, A or B.
Point D is unattainable at the moment. We need an increase in total resources or an improvement in technology to reach this combination of vehicles and personal computers
PPF's AND OPPORTUNITY COST
Reallocating our resources creates an opportunity cost. Choosing more output of good X usually means giving up output of good Y
If a change in demand from consumers means that more motor vehicles need to be produced (a movement along the PPF from point A to C) - there may not be the economic resources available to maintain the output of personal computers.
The opportunity cost of a higher output of vehicles is the output of personal computers that has to be given up.
A non-linear PPF and changing opportunity cost
Because the curve is non-linear, the opportunity cost will change as we move along the production possibility frontier. For example, as more resources are shifted into the notebook computer industry, the extra output declines. Therefore the opportunity cost measured by the lost output of vehicles is increasing. See the change in the tangents between A-B and between C-D in the diagram above
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