PRODUCTION POSSIBILITY CURVES

The PPF illustrates the concepts of choice and opportunity cost. If we assume
that a country only produces food and clothing.  If that country wishes to
produce more food, then it would have to sacrifice the production of some
food.  Therefore we can say the opportunity cost of producing more food is
clothing.

If the economy is producing at point V is can be seen that it is not producing
efficiently, as it could increase production of clothing and food with the
resources it already has.
We can also demonstrate the concept of increasing opportunity costs.  In
other words that as a country produces more and more of one good it has to

sacrifice increasing amounts of the other.  This occurs because different
factors of production have different properties, people have different skills,
land differs in different parts of the country etc..  Therefore as a nation
concentrates more on the production of one good, it has to start using
resources that are less and less suitable.  The production of more and more
clothing involves a growing marginal cost - ever increasing amounts of food
have to be sacrificed for each additional unit of clothing produced.

It is because of increasing opportunity costs that the PPF is bowed outwards,
rather than being a straight line.  In the diagram below we can see that as
production increases from x to y to z, so the amount of food sacrificed rises
for each additional unit of clothing produced.  The opportunity cost of the fifth
million units of clothing is 1 million units of food.  The opportunity cost of the
sixth million units of clothing is 2 million units of food.

Also remember the example of the nation going to war and having to produce
guns after only producing food.

SHIFTS OF THE PPF

As you know, a nation is unable to produce outside of the PPF. A nation is
able to shift its PPF to the right (so that it can produce a greater amount of
goods) in one of two ways:
•  Increasing the number of resources available for production, e.g.,
increase in the number of workers or factories.
•  Increasing the quality of resources available for production, e.g.,
education and training makes workers more productive, technological
progress allows machines to produce more with the same amount of
resources.

A shift of the PPF can be shown below: