In this article, we’re going to discuss the production possibilities frontier, which is also known as the PPF. So the PPF is simply a graph that shows all the different combinations of goods and services that an economy could produce given its current level of resources.
Let’s take Japan and let’s say that Japan has a choice between producing two Goods, it can produce cars it could produce trucks or could produce a combination of the two right so Japan has to decide well how many cars and trucks do we want to produce? Let’s say that Japan produced zero trucks, so trucks are on the x-axis so zero trucks would be right here.
And that would correspond to a level of 50 million
cars so basically, this is saying if Japan focuses simply on producing cars and just completely said “Forget about trucks we’re not going to produce trucks, just cars”, Then Japan will be able to produce 50 million
cars. Now you might say why can’t they produce 60 million? Why can’t they produce 70 million? Because Japan is given its level of current resources, right? Japan only has access to so much steel
to so much rubber
that they can only produce a limited amount of products, remember when we talked about scarcity
? So resources are limited so it’s basically saying look if Japan just strictly focused on making cars the max that they could produce is 50 million
Now there are different combinations, obviously, Japan doesn’t have to just say “We just want to do cars” or “We just want to do trucks” they can have different combinations. Basically, all the points along this curve are different combinations of cars and trucks that Japan could produce.
For example, let’s say that they were going to produce 40 million cars right and they were going to produce 40 million cars and so that brings us to this point in “Point A” and let’s say that also corresponds to 40 million trucks. So hypothetically this combination here would correspond to 40 million cars and 40 million trucks instead of fifty million cars and zero trucks. That’s right here.
But another combination is forty million cars and forty million trucks. So they call this first combination (A) and then the second one is (B). So to go from point A to point B what are they giving up? Well, they’re giving up ten million cars because they’re going from fifty million to forty million in Y-axis. They’re gonna have ten million fewer cars, that they’re going to produce. that’s the difference right here
But what are they getting in exchange? They’re getting forty million trucks. That’s the marginal cost of going from A to B the marginal cost would be ten million cars. So ten million cars would get you 40 million trucks So you can think about that in terms of marginal cost or the opportunity cost remember when we talked about an opportunity cost? The opportunity cost of going from point A let’s say to point B is that we’re giving up 10 million cars but we’re getting 40 million trucks.
So now all these points along this curve are efficient in production and we’re gonna talk about all this more in future articles but we say if these points are efficient that means that at any of those points along the curve, Japan could not produce an additional unit of either a car or a truck without giving up one of the other. At point B for example, when I got 40 million cars 40 million trucks they could not produce 41 million cars in 40 million trucks if they wanted to go to 41 million cars they would have to decrease their production of trucks.
So when we say it’s efficient in production, we’re saying that you couldn’t produce 41 million cars. Let’s go back to point A, at Point a Japan cannot produce an additional car beyond 50 million. It could not do that or it’s just not able to do it. So basically you think about the term of opportunity cost or and then we can think about the marginal cost. A marginal cost as we go along this curve will be decreasing or increasing and when I say that the marginal cost is increasing what I mean is that from 50 million to 40 million we give up 10 million cars but we get 40 million trucks now let’s say we want to go to 50 million trucks now we get where we have to give up 40 million cars right so we give up 10 million cars to get 40 million trucks.
But now the incremental costs the marginal costs to go from 40 million trucks to 50 million trucks we now have to give up 40 million cars. So we say that the marginal cost is increasing and that’s why we have the bowed-out shape of the PPF.
The PPF looks like this but it doesn’t look like just a straight-line that basically saying that there is no increasing marginal cost the marginal cost is constant and that’s possible but usually it’s the case where it’s bowed-out like this because we say that you know as you produce more and more of one good, as we produce more and more trucks it’s like the equipment that we have to produce trucks some of the equipment that we have was better for you producing cars and we start repurposing that to produce trucks and it gets more and more difficult.
So it’s harder at those extremes. Basically, the marginal cost is increasing and that results in this bowed-out shape of the PPF. Now I had said that it’s efficient in production any of these points along the curve. Now the points behind the curve outside there those points are not feasible, not feasible means that the current level of resources we cannot get to any of these points.
We can’t no matter what we do even if we decrease our truck production to zero we cannot produce 51 million cars. It’s not possible at this point and then the points along the curve are efficient as we discussed. Now the points inside the curve are inefficient that means that we’re either wasting resources or we’re misallocating resources.
So let me give you an example let’s say that we were looking at let’s say this point right here and let’s say that this point corresponds to 30 million cars and 40 million trucks. Now this point, when we say it’s inefficient what it means is that we are at 30 million cars & 40 million trucks we already know what’s possible with our level of resources to produce 40 million cars and 40 million trucks, right? At point B so we can produce 40 million of each so why would we produce 30 million of the 1 of cars? We could increase without giving up anything else. Without giving up anything any additional trucks we could produce an extra 10 million cars. We could go from inefficient point to point B without giving up any trucks. Why wouldn’t we be doing that?
We said at that point is inefficient and the reasons are that we’re maybe wasting resources maybe we’re not using all the labor and capital that we have available to us. Now let’s say there was a new technology that allowed it to make it easier to make trucks, then the curve might look something like expanded outward, and now maybe instead of producing the max 50 million trucks maybe it’s 80 million. Then also when we engage in trade that allows us to consume actually outside at a point that’s not feasible and we’re gonna talk about all of this more in the articles to come I just want to give you a general overview of the PPF.