Understanding the Concept of Production Possibilities Frontiers                                                                                                                                                                                                                                                                                                                                                                                                                                   
                                                                            
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
                                                                           
                                                                          ª  Efficiency means making the largest output with the limited resources available. 
                                                                           
                                                                          ª  Production possibilities frontier (PPF) is a graph showing the various combinations of 
                                                                                            output that an economy can produce with its available resources and its given technology.        
                                                                           
                                                                          ª  The production possibilities frontier shows the opportunity cost of producing goods in an 
                                                                                            economy. 
                                                                           
                                                                                                                                                                                                                                                                                                                             You can more easily understand the concept 
                                                                                                                                                                                                                                                                                                                             of a production possibilities frontier 
                                                                                                                                                                                                                                                                                                                             (PPF) if you assume that your economy 
                                                                                                                                                                                                                                                                                                                             produces only two goods. With a fixed amount 
                                                                                                                                                                                                                                                                                                                             of resources and a fixed technology, the PPF 
                                                                                                                                                                                                                                                                                                                             answers the question of what is the maximum 
                                                                                                                                                                                                                                                                                                                             amount of output that the economy can 
                                                                                                                                                                                                                                                                                                                             produce. The maximum amount of production 
                                                                                                                                                                                                                                                                                                                             represents the maximum efficiency in the 
                                                                                                                                                                                                                                                                                                                             use of the limited resources.   
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                             In this example, your economy could produce 
                                                                                                                                                                                                                                                                                                                             80 bushels of wheat and zero bushels of rice, 
                                                                                                                                                                                                                                                                                                                             or it could produce 100 bushels of rice and 
                                                                                                                                                                                                                                                                                                                             zero bushels of wheat. Other combinations on 
                                                                                                                                                                                                                                                                                                                             the curve are also possible and efficient.  
                                                                                                                                                                                                                                                                                                                  
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                             Because of scarcity of resources, combinations 
                                                                                                                                                                                                                                                                                                                             outside the frontier, such as point S, are not 
                                                                                                                                                                                                                                                                                                                             atttainable. Combinations inside the curve, 
                                                                                                                                                                                                                                                                                                                             such as point U, are attainable but are an 
                                                                                                                                                                                                                                                                                                                             inefficient use of resources.  
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                 
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                            
                                                                                                                               
                                                                                                                              The PPF shows the opportunity cost of 
                                                                                                                              producing an economy’s products. The cost of 
                                                                                                                              producing rice is the wheat that you have to 
                                                                                                                              give up to produce it. At any point on the PPF, 
                                                                                                                              divide the change in wheat production by the 
                                                                                                                              change in rice production. 
                                                                                                                               
                                                                                                                              In this example, you have to give up 2 bushels 
                                                                                                                              of wheat to produce the first 20 bushels of 
                                                                                                                              rice. Therefore the opportunity cost is one-
                                                                                                                              tenth bushel of wheat for one bushel of rice.    
                                                                                                                               
                                                                                                                               
                                                                                                                              The opportunity cost changes as you move 
                                                                                                                              down the PPF. At the other end, the 
                                                                                                                              opportunity cost of producing more rice is 
                                                                                                                              much higher in terms of wheat given up. Here 
                                                                                                                              you have to give up 1.9 bushels of wheat to 
                                                                                                                              get an additional bushel of rice. Once again, 
                                                                                                                              divide the change in wheat by the change in 
                                                                                                                              rice production. This procedure is sometime 
                                                                                                                              called dividing the rise (the change along the 
                                                                                                                              vertical axis) by the run (the change along the 
                                                                                                                              horizontal axis).  
                                                                                                                          
                                                                                                                               
                                                                                                                              The slope of the PPF gives you the opportunity 
                                                                                                                              cost of producing one good in terms of the 
                                                                                                                              other good. It is concave and downward 
                                                                                                                              sloping, meaning that the opportunity cost of 
                                                                                                                              producing rice is increasing. The reason that 
                                                                                                                              the cost is increasing is that not all resources 
                                                                                                                              are equally suitable for producing rice and 
                                                                                                                              wheat. If you want to produce more rice, you 
                                                                                                                              may have to use drier land that would be 
                                                                                                                              more suitable for wheat; therefore yields 
                                                                                                                              would go down.