1.04 Production Possibilities Frontier

Introduction

In this unit, you have learned that every decision you make involves opportunity cost. When you decide to do something, buy something, make something or provide benefits to someone, you are giving up an opportunity to do something else. While the idea of opportunity costs can seem abstract, a good visual representation of the idea of opportunity cost can be represented in the Production Possibilities Frontier (PPF).

• The PPF is a graph that illustrates the opportunity cost of gaining more of one good.
• The PPF graphically represents the point at which an economy is most efficiently producing its goods and services and, therefore, allocating its resources in the best way possible.
• It is sometimes referred to as the PPC (Production Possibilities Curve).

By the end of this lesson, you will be able to understand all of the important points represented in the PPF, and how it very easily represents the idea of opportunity costs. The PPF not only helps people make decisions, it also helps them understand the tradeoffs of these decisions.