• The?Production Possibility Frontiers?(PPF)?model is an?economic model?that considers the?maximum possible production?(output) that a country can generate if it uses all of its factors of production to produce?only two?goods/services
• Any two?goods/services can be used to demonstrate this model
• Many PPF diagrams show?capital goods?and?consumer goods?on the axes
  • Capital goods are assets?that help a firm or nation to produce output?(manufacturing). For example, a robotic arm in a car manufacturing company is a?capital good
  • Consumer goods are end products?and have?no future productive use. For example, a watch

A PPF for an economy demonstrating the use of its resources to produce capital or consumer goods

Diagram Explanation

• The use of PPF to depict the maximum productive potential of an economy
  • The curve demonstrates the?possible combinations of the maximum output?this economy can produce?using all of its resources?(factors of production)
  • At A, its resources are used to produce?only consumer goods?(300)
  • At B, its resources are used to produce?only capital goods?(200)
  • Points C & D both represent?full?(efficient) use of an economy's resources as these points?fall on the curve. At C, 150 capital goods and 120 consumer goods are produced
• The use of PPF to depict?opportunity cost?using?marginal analysis
  • To produce one more unit of capital goods, this economy must give up production of some units of consumer goods (limited resources)
  • If this economy moves from point?C (120, 150)?to?D (225, 100), the?opportunity cost of producing?an additional?105 units of consumer goods is 50 capital goods
  • A?movement in the PPF?occurs when there is any change in the?allocation of existing resources?within an economy such as the?movement?from point C to D
• The use of PPF to depict efficiency, inefficiency, attainable and unattainable production
  • Producing at any point on the curve represents?productive efficiency
  • Any point inside the curve represents?inefficiency?(point E)
  • Using the current level of resources available,?attainable production?is any point on or inside the curve and any point outside the curve is unattainable (point F)

• As opposed to a movement in the PPF described above, the?entire PPF of an economy can shift?inwards or outwards

Outward shifts of a PPF show economic growth & inward shifts show economic decline

Diagram Explanation

• Economic growth?occurs when there is an increase in the?productive potential of an economy
  • This is demonstrated by an?outward shift?of the entire curve.?More consumer goods?and?more capital goods?can now be produced using all of the?available resources
  • This shift is caused by an increase in the?quality or quantity of the available factors of production
    • One example of how the?quality?of a factor of production can be?improved?is through the impact of?training and education on labour. An educated workforce is a?more productive workforce and the?production possibilities increase
    • One example of how the?quantity?of a factor of production can be?increased?is through a change in migration policies. If an economy allows?more foreign workers?to work productively in the economy, then the?production possibilities increase
• Economic decline?occurs when there is any impact on an economy that?reduces the quantity or quality?of the available factors of production
  • One example of how this may happen is to consider how the Japanese tsunami of 2011 devastated the?production possibilities?of Japan for many years. It?shifted their PPF inwards?and resulted in?economic decline