Essay On Production Possibility Curve

A discussion on the importance and limitations of the production possibility curve (PPF) within Managerial Economics will be detailed further.

The production possibility frontier/ curve (PPF) is used to describe the production capacity of a country. Typically, it is reflected with two dimensions for convenience, though in reality it has many dimensions, one for each product (good) that could be produced. It also portrays the underlying condition of scarcity and unlimited wants that are paramount for neoclassical economics. The underlying scarce resources determine the limits of the production output, and thus consumption. The production possibilities curve indicates the combinations of any two products or services that are attainable when

Typically, cost of products are measured in currency (rands and cents) but this method is arbitrary when one takes inflation into account. The frontier allows for cost measurement of producing one product in terms of not producing other products. Another area where PPF is applied is international trade. Different countries, due to their unique comparative and absolute advantages, have different PPF curve shapes. This allows each country to maximise their production positions through the use of international trade. The net effect is increased production of a specific product/ service that would have otherwise been possible. Stated differently, the combined PPF of both countries is larger than the PPF of each country alone. The PPF can also be used to describe inefficiency in production, unemployment, and the business cycle. During a recession, the economy produces below potential GDP due to unemployment. This translates into a production position that is below the PPF (inefficient position) and the country could have more economic output if all available human resources was employed. Finally, the PPF can also describe changes in technology and overall economic growth. If technology makes production of one product more efficient, the PPF will expand in the direction of that product. If there is growth in the economy as a whole, the entire PPF will expand