Production Possibility Frontier
In economics, the term production possibility frontier refers to a graph that is used for comparing the rates of production of two commodities that make use of the same fixed total of factors of production. Production possibility frontier is also known as production possibility curve, production transformation curve and production possibility boundary.
Graphically, the production possibility curve bounds the production set and shows one commodity’s maximum specified level of production considering the level of production of the other is given. By doing this, the productive efficiency related to that production set can be defined. A period of time and the technologies of production are both specified. The commodity that is compared can be a good or a service.
Detail description of production possibility frontier
The production possibility frontiers are basically concave that is the curves are upward bulging from the origin. However, they can also be downward bulging or linear that is they can be represented as convex or straight depending on various factors. A production possibility frontier can be used for representing numerous economic concepts like the scarcity of resources which is the basic economic problem faced by all societies; economies of scale, marginal rate of transformation or opportunity cost, efficiency of allocation and production efficiency.
When there is a growth in the inputs available like labor or physical capital, progress in technology related to the knowledge of transforming inputs into outputs, then the production possibility frontier shifts outwards. Such an outward shift in the production possibility frontier allows economic growth of an economy which already operates at its full productivity. This means that without sacrificing the output of any of the good, more outputs of both can be produced during the specified time period. On the other hand, depletion of raw material supply, decrease in labor force, or decrease in the stock of physical capital due to natural disaster results in the inward shifting of production possibility frontier. Most of the economic contradictions show not that more cannot be produced, but that the economy operates below the frontier and mainly there is underemployment of physical capital and labor.
The point on PPF that represents the combination in which an economy operates reflects the priorities of the economy.
- Debt ratios
- Liquidity ratios
- Profitability ratios
- Asset management ratios
- Cash Flow Indicator Ratios
- Market value ratios
- Financial analysis
- Business Terms
- Financial education
- International Financial Reporting Standards (EU)
- IFRS Interpretations (EU)
- Financial software
Most WantedFinancial Terms
- Most Important Financial Ratios
- Debt-to-Equity Ratio
- Financial Leverage
- Current Ratio
- Interest Coverage Ratio (ICR)
- Receivable Turnover Ratio
- Return On Capital Employed (ROCE)
- Accounts Payable Turnover Ratio
- Debt Service Coverage Ratio
- Return On Equity (ROE)
Have 10 minutes to relax?Play our unique
Play The Game