Lessons In Macro Economics - Production Possibilities Frontier

The Productions Possibilities Frontier (PPF) is a simple model in macroeconomics, which is supposed to demonstrate how much of any two products a given country can produce efficiently in a given time period holding production factors constant. Production factors include - land, labor, capital, and technology.

This model became popular during world war two in order to justify war rationing. The authorities argued that a country could either focus on producing guns, a term used to represent all military equipment and services, or butter, used to represent domestically used goods such as food, clothing, cars, etc. Americans, therefore, would have to sacrifice some of their comfort items in order to support the overall war effort.


Sample Production Possibilities Frontier



In the above graph, points B, C, and D are all efficient points since they are found on the curve itself. Point A is an inefficient use of factors of production, such as having an idle workforce or unused capital since it is below the curve. Point E is unobtainable since it is above the curve.

The rate at which butter can be substituted for guns is represented by the slope of the curve; this is called the Marginal Rate of Transformation (MRT). The MRT also represents an opportunity cost because one has to give up several units of butter in order to obtain additional units of guns. The above graph has an increasing opportunity cost because the MRT increases in absolute value as one specializes in either guns or butter. PPFs also can be drawn to show constant opportunity costs or decreasing opportunity costs, which can be achieved by economies of scale.


This model is also commonly referred to the Production Possibilities Curve.