Production Possibility Frontier - Explained
What is the Production Possibility Frontier?
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What is the Production Possibility Frontier?
The Production Possibility Frontier refers to a curve that presents the possible amounts at which two distinct products can be manufactured when the resources and technology that both goods require for their production are made available. PPF is used un business analysis to determine the highest outputs two separate products can give when all resources need for their production are used. PPF accounts for factors such as choice scarcity, and tradeoffs when illustrating outputs of goods. When the PPF shows that production is optimally efficient, a transformation curve is achieved.
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How is the Production Possibility Frontier Used?
Production Possibility Frontier (PPF) is a curve that reflects the possible outputs of two separate goods or services when all resources needed for its production are adequately deployed. PPF rests on an assumption that the production of a god will increase if the production of another decreases given insufficiency in resources among other factors. However, if the resources and technological infrastructure needed for the production of the two separate goods are available, the goods achieve a transformation curve. PPF is concerned about the efficiency that can be achieved when two different goods are produced together. For companies that produce three or more separate products for the same mix of resources and technological infrastructure, the PPF curve is no longer applicable.
Understanding and Interpreting the PPF
The PPF curve is plotted on a graph using an arc, on the graph, there are Y and X-axis, each representing the two separate goods that can be produced when the required resources are made available. There are points on the arc that show the most possible outcomes the products can give when manufactured with the available resources. The PPF curve is important to companies when deciding the commodity or product that is most needed. Take this for example, if the possible output of a corporation that manufactures fabric and cotton is to produce 50 rolls of fabric and 20 pieces of cotton, the management needs to determine which of the product is most needed and why this is so. The opportunity cost of manufacturing the products must also be considered.
Understanding the Pareto Efficiency
Pareto Efficiency is a principle that evaluates the efficiency of the allocation of commodities on the PPF curve. The Pareto efficiency maintains that a PPF curve is inefficient if the total output of commodities is lower than the output capacity. An Italian economist, Vilfredo Pareto created the Pareto efficiency concept. This concept also states that when there are limited resources, only the commodities lying on the Y-axis and X-axis of the PPF curve are the efficient commodities.
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