This post was updated in August of 2018 to include new information and more examples.The idea of a production possibility frontier (PPF)-also sometimes called a production possibilities curve-can seem difficult. However, if you understand the intuition behind the economics of the PPF it is really just a graphical representation of what a country or individual is able to produce with a fixed amount of inputs. For example, most people are able to spend their day working or sleeping. A PPF would show this relationship between work and sleep (with the constraint of time in a day).This article will describe how to derive and draw a PPF given information from a table. Sticking with the example of the United States producing broccoli and pizza from the prior lesson, lets plot out the following PPF given the information from this table. You can see in the diagram below how we took the different combinations of goodsSample PPF with constant opportunity cost(at each of the 6 different points) and plotted them to get a PPF curve. Combination 1 is the choice of completely specializing in Pizza (producing 100 pizza and 0 broccoli), and point 2 shows that we give up 20 pizza in order to get 5 broccoli (which is why the PPF is downward sloping).Points 3, 4, 5, and 6 continue this trade off of 20 pizza for 5 broccoli until we are completely specializing in broccoli (producing 25 broccoli and 0 pizza).
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Note that the bowed out nature of this PPF is due to increasing opportunity costs associated with specialization. Imagine a company that has fields and ovens. If the fields are used to grow broccoli and the ovens are used to cook pizza everything works well.
However, ovens are pretty bad at growing broccoli, and fields are not very good at cooking pizza. This means that devoting all of your resources to the production of one good tends to reduce how good you are at doing it resulting in the bowed out PPF. We can use the information in the diff (differences) column to calculate the opportunity cost of switching between each of the different combinations (for example, switching from point 1 to point 2 gains you 10 broccoli, but you lose 5 pizza). Using this information you can calculate the opportunity cost of pizza or broccoli. So by moving from point 1 to 2, the opportunity cost of broccoli is 0.5 pizza, (likewise moving from 2 to 1, the opportunity cost of pizza is 2 broccoli).
The takeaway from this table is that specialization is bad, because the opportunity costs are rising as we specialize. Choosing a mix of the two goods results in a lower opportunity cost for either good.
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