Production Possibility Frontier (PPF).

PPF is a graph/table that shows the maximum possible combinations of outputs that can be produced from given inputs. Simplifying assumptions:
*. Assume the economy produces just 2 goods
*. Assume that technology and the quantity of factors (inputs such as labour, capital, & raw materials) are fixed
Example: A farmer has a 10 acre field and can grow either wheat or barley on it. The only input is land. He has the following possible combinations:
Wheat 40 30 20 10 0
Barley 0 5 10 15 20
Draw the PPF with Wheat on vertical axis. Note that this is a straight line. Any point on the Production Possibility Frontier is said to be"efficient". The economy is getting themost it can given the fixed resources& technology, and there are many possible efficient combinations.
Inside the PPF is considered inefficient, since the business can produce more of one good without producing less of the other. Inefficiencies arise from unemployed resources or inefficient management. Points outside the PPF are currently unavailable. The PPF can be increased by economic growth which shifts the curve outward. Growth can come from more/better inputs like capital & labour, or from better technology/organization. PPF shows the trade-off between quantities of the two goods (is always downward or negatively sloped).

Production Possibilities Frontier and Opportunity Costs

PPF illustrates the opportunity cost of gaining more of one good. Opportunity cost is equal to "loss" divided by "gain". Opportunity cost ofgood on vertical axis = 1/absolute slope of PPF. Opportunity cost of goodon horizontal axis = absolute slope of PPF. Therefore, when the PPF is a straight line, opportunity cost is constant.
What is the opportunity of Barley and Wheat in the example above? One good can be traded off for the other at a constant rate, and inputs are equally good at producing either good.
When the Production Possibilities Frontier is a curve (bowed out from the origin), the opportunity cost increases as we want more of a good.Inputs become specialized, and it becomes more efficient to produce one good than the other.