The Production Possibility Frontier

Opportunity Cost
The concept that by satisfying one want, we are sacrificing the opportunity to satisfy a substitute want. Therefore the price of satisfying one want is the value of the want we have to forgo, known as the opportunity cost.

Production Possibility Frontier
The Production Possibility Frontier graphically communicated the concept of economic choice and opportunity cost. The PPF demonstrates various combinations of two alternative products. PPFs assume that all technology is fixed and interchangeable between the two product options, all resources are employed to their maximum capacity and the quantity of resources remains unchanged.


The graph above demonstrates all the possible combinations for simultaneously producing certain quantities of wine and cotton. An economy must decide any point along the red line (for example A, B or C) in order to be functioning at its most efficient capacity.

If our resources are not being employed to the maximum capacity, the PPF will remain unchanged however our position in relation to it will move to somewhere below the red line (for example at Point X). On the other hand, if the position moves over the red line (e.g. Point Y), resources are being over used and the economy will go into loss or debt.

Economic growth
New inputs such as the discovery of new resources, invention of more efficient technology or an increase in the population may result in the ability to produce an larger amount of overall goods as shown in the graph below.



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