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17.12 Production Possibilities Frontier

The production possibilities frontier shows the combinations of goods and services that an economy can produce if it is efficiently using every available input. A key component in understanding the production possibilities frontier is the term efficiently. If an economy is using its inputs in an efficient way, then it is not possible to produce more of one good without producing less of another.

Figure 17.10 "The Production Possibilities Frontier" shows the production possibilities frontier for an economy producing web pages and meals. It is downward sloping: to produce more web pages, the production of meals must decrease. Combinations of web pages and meals given by points inside the production possibilities frontier are possible for the economy to produce but are not efficient: at points inside the production possibilities frontier, it is possible for the economy to produce more of both goods. Points outside the production possibilities frontier are not feasible given the current levels of inputs in the economy and current technology.

The negative slope of the production possibilities frontier reflects opportunity cost. The opportunity cost of producing more meals is that fewer web pages can be created. Likewise, the opportunity cost of creating more web pages means that fewer meals can be produced.

The production possibilities frontier shifts over time. If an economy accumulates more physical capital or has a larger workforce, then it will be able to produce more of all the goods in an economy. Further, it will be able to produce new goods. Another factor shifting the production possibilities frontier outward over time is technology. As an economy creates new ideas (or receives them from other countries) on how to produce goods more cheaply, then it can produce more goods.

Key Insights

  • The production possibilities frontier shows the combinations of goods and services that can be produced efficiently in an economy at a point in time.
  • The production possibilities frontier is downward sloping: producing more of one good requires producing less of others. The production of a good has an opportunity cost.
  • As time passes, the production possibilities frontier shifts outward due to the accumulation of inputs and technological progress.

Figure 17.10 The Production Possibilities Frontier