Production Possibilities Frontiers

Imagine a country in which there are only two goods to consume, oranges and cellphones. Let's, put thse two things on a graph. The vertical axis, represents the amount of oranges produced by our imaginary country in one month and the horizontal axis, the amount of cellphones produced in our imaginary country in one month. Let's, put some numbers on the axes. Maybe they represent millions of oranges and millions of cellphones. Let's, call our fictional country orange Stan.

Orange Stan has some choises to make. Suppose that if they put their resources intro producing oranges. They can produces up to four units of oranges. If they put all their resources into producing cellphones, they can produce up to two units of cellphones, but organistan isn't just stuck with these two options. Orangistan could also produce some, each of good.

There is not leisure are no books there are no movies producing inside the PPF make no sense, the citizens of Orange Stan would be happier producing on the line.

But why stop at the line. If more is better, why not produce outside the PPF. A point like this one is not feasible. Sure Orange Stan would love to have more of everything but, they have limited resources and their current technology does not allow them to produce at this point. That's why the PPF is a frontier. It's the edge of what is posible. But what if they discovered more resources, or a new technology allowed. Then, to make better use of the resources they already have, the production possibility frontier might shift or move. Suppose they become able to produce everything, for example, that is it they're producing all oranges, they could give up two units of oranges and get one unit of cellphones. As they continue to give up oranges and get one unit of cellphones. As they continue to give up oranges and get cellphones the line grow up until touches both axes.

This line is called a production possibilities frontier of PPF. The production possibilities fronties shows us all the combinations of orange and cellphones that can be produced the citizen of Range Stan could choose to produce at a point inside the PPF.

We say that this point is inneficient because Orange Stan could have more of both goods at no cost. That is there's no reason to produce inside the PPF. It's not as though gives the people in Orange Stan more time to relax, or read a book or go to a movie in our imaginary world there are only to consume Orange and cellphones.

The improvements in techonology causes the PPF to move away from the origin. Now our fictional country can produce more of both, and cellphones. In fact, the PPF has moved so much, that the point that was previously impossible, has become able to take advantage of new resources, or if anything else happen to increase their to produce for examle, suppose Orange Stan discover and island on which the soil was especially good for growing oranges.

Notice that PPF rotates, with a maximum amount of orange increasing, but the maximun amount of cellphones not changing. We've already seen one argument for trade. When people voluntarily exchange with each other they are better. Now that we know what a production possibility frontier is, we can use it to see another argument fortrade.

Questions:

1. What does the line of PPF represent?

It's the limit of production that a country can produce using in efficient way their resources.

2. What happen when the production (represented with a point) is inside of the PPF and not on the line?

When you are inside of the PPF line, you are inefficient because you are losing resources.

3. Why not produce outside the PPF line? It is feasible? Why?

No, because the country hasn't got the necesary resources to produce beyond its possibilities.

4. How will be possible to produce outside the PPF line?

Increasing the resources and/or the technology.

5. Why do we say that the PPF is an economic model?

We say that the frontier of production is an economic model because through theorical combinations in productive factors it's possible to know how to reache the maximun production.