PPC /PPF
PPC shows combinations of two goods that can be produced with available resources.
3 assumptions of PPC:
Resources are given,
resources and fully and efficiently utilised,
technology remains constant.
Production possibility frontier (PPF) is referred to as a graph that shows the maximum possible
output that can be achieved by two goods when the input is maintained constant or fixed. It
explains Scarcity , Trade off , Opportunity cost.
The factors that are included in the input are natural resources, capital goods, labour and
entrepreneurship.
The production of one good can be increased when the production of the other good is
sacrificed. The Production Possibility Frontier (PPF) is also known as the PPC.
The slope of the PPF is indicative of the opportunity cost of producing a good in comparison
to another good. The same can be used for comparing the opportunity costs of another producer
for determining the comparative advantage.
Interpreting the PPF Curve
The shape of the PPF curve is like a bow in an outward position. The highest point on the graph
will be when a good is produced on the y-axis and the second good is not produced at all on
the x-axis.
The widest part of the curve will be represented by the point where no good is produced on y-
axis whereas maximum production is happening on the x-axis.
All other points in the graph are regarded as tradeoff points, which means both the goods are
produced in varying degrees in these points.
The points on the PPF curve are said to be efficient and indicates that the resources of the
economy are utilised fully. This is known as the Pareto Efficiency, which refers to the idea that
an economy is operating at its full potential and there is no possibility of getting more output
from the available resources.
The points inside a PPF curve are known as inefficient points as the output from these points
could be greater than the economy’s current resources. Conversely, the points outside the PPF
curve represents production of two goods at its maximum level, which is not possible due to
limited or fixed resources.
Impact on Economy
It helps in letting the businesses understand how much quantity of good must be given up in
order to make space for producing another type of good.
The PPF and Comparative Advantage
While every society must choose how much of each good it should produce, it does not need
to produce every single good it consumes. Often how much of a good a country decides to
produce depends on how expensive it is to produce it versus buying it from a different country.
As we saw earlier, the curvature of a country’s PPF gives us information about the tradeoff
between devoting resources to producing one good versus another. In particular, its slope gives
the opportunity cost of producing one more unit of the good in the x-axis in terms of the other
good (in the y-axis). Countries tend to have different opportunity costs of producing a specific
good, either because of different climates, geography, technology or skills.
Suppose two countries, the US and Brazil, need to decide how much they will produce of two
crops: sugar cane and wheat. Due to its climatic conditions, Brazil can produce a lot of sugar
cane per acre but not much wheat. Conversely, the U.S. can produce a lot of wheat per acre,
but not much sugar cane. Clearly, Brazil has a lower opportunity cost of producing sugar cane
(in terms of wheat) than the U.S. The reverse is also true; the U.S. has a lower opportunity cost
of producing wheat than Brazil. This can be illustrated by the PPFs of the two countries in the
following graphs.
Production Possibility Frontier for the U.S. and Brazil
When a country can produce a good at a lower opportunity cost than another country, we say
that this country has a comparative advantage in that good. In our example, Brazil has a
comparative advantage in sugar cane and the U.S. has a comparative advantage in wheat. One
can easily see this with a simple observation of the extreme production points in the PPFs of
the two countries. If Brazil devoted all of its resources to producing wheat, it would be
producing at point A. However, if it had devoted all of its resources to producing sugar cane
instead, it would be producing a much larger amount, at point B. By moving from point A to
point B Brazil would give up a relatively small quantity in wheat production to obtain a large
production in sugar cane. The opposite is true for the U.S. If the U.S. moved from point A to
B and produced only sugar cane, this would result in a large opportunity cost in terms of
foregone wheat production.
The slope of the PPF gives the opportunity cost of producing an additional unit of wheat. While
the slope is not constant throughout the PPFs, it is quite apparent that the PPF in Brazil is much
steeper than in the U.S., and therefore the opportunity cost of wheat is generally higher in
Brazil. Countries’ differences in comparative advantage determine which goods they will
choose to produce and trade. When countries engage in trade, they specialize in the production
of the goods that they have a comparative advantage in, and trade part of that production for
goods they do not have a comparative advantage in. With trade, goods are produced where the
opportunity cost is lowest, so total production increases, benefiting both trading parties.
Key Concepts and Summary
A production possibilities frontier defines the set of choices society faces for the combinations
of goods and services it can produce given the resources available. The shape of the PPF is
typically curved outward, rather than straight. Choices outside the PPF are unattainable and
choices inside the PPF are wasteful. Over time, a growing economy will tend to shift the PPF
outwards.
