O The production possibility frontier (PPF) depicts the maximum possible output combinations of two goods an economy can produce with limited resources. It shows all efficient points and that any point inside is inefficient while outside is unattainable. O The slope of the PPF indicates the opportunity cost of producing one good versus another. A steeper negative slope means a greater trade off is required. O The PPF can shift due to changes in resources, technology or their productivity. Increased resources or better technology allows more output combinations and shifts the curve outward.

1. Limits Alternatives and Choices
McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 1
Slope of the Curve and Production
Possibility Curve
Economics Principles, Problems and
Policies
McConnell, Brue, Flynn

2. Slope of the curve defines the nature of the curve in the graph
• Zero slope means that the curve is as flat as x axis
• Infinite slope means that the curve is as steep / vertical as
the y axis line
• Slope tells how much item in y axis is increased if the item
in x axis is increased by 1 unit and vice versa.
2
In this Session you will

3. From C to D,
“rise” =
–200 mangos
(800 mangoes to
600 mangoes)
“run” =
+50 fish (100 fish
to 150 fish)
Slope = – 4 =
(-200/50)
Hence if 1 fish is
increased 4 mangoes
decrease Quantity of Fish
D
C
Quantity of Mangos
The Slope of the Curve

4. First topic to discuss in micro economic is how we can
manage our increasing unlimited needs (consider it
more and more goods and services for us) and our
limited and scarce resources (workers, machinery or
fuel).
So we will make a criteria which will define what is
efficient production (maximum production with
minimum resources) and what will happen if
conditions can change
Deciding how much to Produce

5. Production – output of goods and services
Possibility – maximum attainable amount (for
simplification we use two type of output)
Frontier – border or boundary
PPF is the curved boundary shows maximum possible
number of different combinations of output that a
society can produce at a given time when there is
full utilization of economic resource and fixed
technology
Assumptions: Full employment, Resources are fully
used, technology is constant, two types of goods are
produced, capital and consumer good.
Production Possibility Curves (Frontier) PPF

6. Resources
Economist classify the economic resources into four general categories
Land: Include all natural resources “ gift of nature” used in the
production process.
Labor: consist of the physical actions and mental activities that people
contribute to the production of goods and services. The work-related
activities of logger, retail clerk, teacher and engineer etc.
Capital: Include all manufacturing aid s used in producing consumer
good and services
Entrepreneur: Is the special human resource, distinct from labor called
entrepreneur
Entrepreneur
• takes initiative in combining the resources of land, labor, capital to
produce goods and services
• Make strategic business decision
• Innovates
• Bear risks

7. OThe production possibility frontier depicts not only
limited capability and as per our unlimited needs we
cannot go beyond PPF hence it represents scarcity.
OWhile moving on the curve there are alternative
combinations representing opportunity cost.
OAny point inside the curve – suggests resources are
not being utilised efficiently
OAny point outside the curve – not attainable with the
current level of resources
Production Possibility Curves (Frontier) PPF

8. Alternative
Outputs
Guns
(000
units)
Butter
(million
units)
A 0 22
B 2 19
C 5 15
D 9 7
E 10 0
Here points A to E are on the PPF
boundary are best possible that
country can produce we call them
efficient
Point F is not best possible but it is
less than efficient, so we call it
inefficient
Point G is beyond efficient, under
current situation it is unattainable.
Moving from D to C
the benefit is 8 extra units of butter
and the opportunity cost is 4 less
units of guns
Production Possibility Curves (Frontier) PPF

9. • Why is points inside the PPF are inefficient?
As it is assumed in the PPF that it is the point with full utilization of
resources, but if we see point F country can improve in terms of butter
or gun. It means the resources are not being used fully.
• What defines PPF to be negative sloped
The scarcity of resources forces us to trade off between two possible
outputs. Because of this the PPF is negatively sloped
• What can be the factors that can shift the PPF
In the definition, it is assumed that total resources are fixed and
technology is fixed. Hence any one of then change the PPF will
change. And shift depends on the nature of change in assumption.
Production Possibility Curves (Frontier) PPF

10. Butter
Gun
0 2 4 6 8 10 12 14 16 18 20 22 24
12
11
10
9
8
7
6
5
4
3
2
1
E
D
C
B
A
What if overall
Technology is
improved?
If there is better
technology, we will be
able to produce more of
both type of output using
less resources hence our
capacity will increase and
PPF go outward
At same time we will be
able to make more guns
and more butter
If technology is reduced
PPF will shift inward
PPF Shifting
Production Possibility Curves (Frontier) PPF

11. Butter
Gun
0 2 4 6 8 10 12 14 16 18 20 22 24
12
11
10
9
8
7
6
5
4
3
2
1
E
D
C
B
A
What will happen if the
resource (labor) used for
producing butter are
increased or become more
skilled?
Extra labor will be able to
produce more and more skilled
labor will be able to work faster
This will rotate the PPF
outward from the butter end
but Gun end will remain fixed.
Similarly if Labor are reduced
or there are less skilled then the
curve will rotate inward
PPF Shifting
Production Possibility Curves (Frontier) PPF

12. Consider country is producing two types of product,
one is wheat and other is computers.
For wheat we have farmers and for computer we have
computer engineers as resource.
Here resources are specialized, means farmer do not
know how to make computers and engineers do no
know how to grow wheat.
And we assume that the number of farmers and
engineers are equal
So they are good in their field but they will take time
to learn the other field.
Why PPF are Bent outward?

13. Set Wheat Computers
I 100 0
II 60 60
III 0 100
Set I is : when we use all
resource to grow wheat
Set II is : when we use half
resource to produce wheat
and half to build computer
Set III is : when we use all
resource to build computers
Why PPF are Bent outward?

14. In reality all resources do not have same kind of ability, there
might be some farmers and some engineers if there are only
two types of product produced (Wheat & Computer)
Forcing resource to work in other field like farmer to make
computer or engineer to grow wheat. They will take time to
learn the new process. Since engineer will not be as good as
a farmer in growing wheat and vice versa. So there will be
some loss in production
If both resources are working in the field where they are
efficient. Then there will be more output produced.
Hence the PPF is bent outward because of the principle of
Increasing Costs.
Why PPF are Bent Outward?

15. • So we came to know that because of specialization
of resources PPF is bent outward
• Prompting us that the mixed combination is more
fruitful than the extreme combination.
• It seems very easy to find the maximum benefit
point if the PPF shape is known but how we will
find it when it is not known.
Selection of Maximum Benefit point

16. In reality all resources do not have same kind of ability, there
might be some farmers and some engineers if there are only
two types of product produced (Wheat & Computer)
Forcing resource to work in other field like farmer to make
computer or engineer to grow wheat. They will take time to
learn the new process. Since engineer will not be as good as
a farmer in growing wheat and vice versa. So there will be
some loss in production
If both resources are working in the field where they are
efficient. Then there will be more output produced.
Hence the PPF is bent outward because of the principle of
Increasing Costs.
Why PPF are Bent outward?

17. Conclusion
Circular Flow Diagram

18. • Production of the country faces scarcity
• We have limited resources and our need to
produce and get profit is unlimited
• We have to choose the best possible output
combination and trade off other combinations
• This way we are able to manage our resources
in an efficient way to try to maximize the
fulfillment of our needs and wants.
Conclusion