Production Possibility Frontier

Topics: Economics, Decision making, Economics terminology Pages: 2 (635 words) Published: December 9, 2005
The term in macroeconomics known as the Production Possibility Frontier is simple to understand. It is a method used to represent (in the form of a graph) the point in which an economy is producing its goods and services with efficiency. It also shows whether the economy is allocating their resources in the best way possible. If the economy is not producing the quantities indicated by the PPF, resources are not being managed efficiently and the production will decrease. The production possibility frontier also shows that a limit to production exists. To attain efficiency, the economy must make a decision on what combination of goods and services to produce.

Production possibility frontier is presented in the form of a graph. This graph is basically a guide to assist in the decision making needed to increase the production of a combination of two or more goods and services. An economy must also be watchful to manage the available resources in an efficient manner. If this is not done, the PPF will indeed show that the economy is not producing a sufficient amount of its product considering the potential of its resources. This is a PPF chart:

I will use this chart to give you a personal example to demonstrate the concept of PPF. I want to use a simple example for easy understanding. One summer when I was a young kid, I began selling lemonade and frozen Kool-Aid to the neighborhood kids. I did this to save money for a bike. On the chart you see Product A, being the lemonade, and Product B, the frozen Kool-Aid. Points A, B and C represent the most efficient use of resources, by in this case, me. The curve going through these three points is what I would like to see. It lets me know that I am meeting PPF, and using my resources well. Point X, on the other hand is not something I want to see. This is because point x tells me that I am not producing as much as I can considering the resources available to me. As I increased one product, I would slightly decrease...
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