If you had only three cups of flour and a little yeast, butter, and sugar, could you bake a cake, a loaf of bread, and a dozen muffins? Of course not! Given the flour available, you’d have to make a choice because producing the cake and the bread and the muffins and the pancakes would be impossible. Something has to give! Similarly, scarcity forces society as a whole to make choices about the goods we produce and consume.
A production possibilities frontier (PPF) is among the simplest models of an economy.
A production possibilities frontier depicts the maximum combinations of goods a society can produce in a given period.
This model relies on three critical assumptions:
The amounts of labor, capital, land, and entrepreneurship are fixed, but can be allocated among different types of production.
Technology, which includes such things as the state of knowledge about production and the qualities of resources, is assumed constant.
All scarce resources are fully and efficiently employed.
Suppose you live in Tyrania, a mythical empire ruled by the dictator Atilla. Tyrania contains 1,000 units each of capital, land, and labor. Atilla believes that "balanced" production requires all industries to use the same proportional mix of resources. (In a moment, you will see how dopey this constraint on technology is.)
Some production possibilities for Tyrania using Atilla's technology are detailed in the table in Figure 2. Points a, b, c, d, and e denote five possible combinations of armaments and bread that can be produced per day. (For simplicity, we assume that only two goods are produced.) As resources are shifted from armaments to bread, weaponry output falls and bread output rises. When all resources are used to produce guns, no bread is produced, and vice versa.
Primitive Production Possibilities Frontier
Alternatives a through e are only five of many feasible combinations. Atilla can choose any point on the production possibilities frontier (PPF) graphed by connecting combinations a through e with a smooth line. The point chosen (answering the question of what will be produced) depends on whether he wants people better fed and less well defended, or vice versa. Atilla would never knowingly choose a point such as x because some resources would either be wastefully used or idle. Productive efficiency (addressing how production will occur) requires being somewhere on the PPF. Moving from x to a point between c and d so that more of both goods was produced could eliminate any inefficiency (e.g., underemployment).
Producing 1,250 units of each commodity at point z is clearly preferable to all points on the existing frontier. Resources cannot be stretched to attain point z, however, in part because Atilla insists on his "balanced" but very limited production technology. Remember that an economy operating on its production possibilities frontier produces efficiently, given its technology. No point beyond the current PPF is attainable—a PPF shows the maximum producible combinations with fixed resources and technology.
What does bread cost in our example? If Tyranians move from point c in Figure 2 to production possibility d, they gain 250 boxcars of bread but lose 250 machine guns; the cost of each extra boxcar of bread is one machine gun. The guns forgone for extra bread are the opportunity costs (in guns) of producing and consuming more bread, and vice versa. Thus, slope at any given point on a PPF reflects the opportunity costs of shifting toward greater production of a good from that point. A straight-line PPF such as this one yields constant costs—producing an extra boxcar of bread costs one machine gun at every point along the curve. But constant cost is actually an unlikely case–in fact, diminishing returns normally lead to increasing production costs.