Production Possibilities Frontier – Function and Importance

Production Possibilities Frontier

The frontier of production possibilities is a model of the marginalist school, which contains the combinations of theories corresponding to production. Alon with resources and technologies in which maximum production is achieved. It is a reflection of the amount of goods and services that a company produces in a given period of time. This is done taking into account the technology and knowledge that said company has to carry out said production. It is worth noting that it is a graphic representation. Actually it reflects as we mentioned before the maximum amount of production that can be obtained. Nor carried out by a company during a certain period of time. If you want to know more about production possibilities frontier and its characteristics, stay with us! 

Function of Production Possibilities Frontier (PPF)

In an economy where the possibilities of producing one or another good or product are almost infinite. Then it is necessary to know the alternatives to produce one or the other and in what quantity. Since when choosing one or the other alternative there will be losses or gains. So that relationship is known as an opportunity cost.

What is the Opportunity Cost?

It is the cost of producing one product with respect to another, which we renounce. Actually when we make a determined decision, this includes any benefit that could have been obtained with the other option.

This concept is very important in the world of finance and economics. Since investing has its risks, gains and opportunities which are necessary to know before choosing one option or another. Especially from the point of view that this calculation is carried out taking into account the future profitability of said product.

What does the Production Possibilities Frontier Represent?

It represents graphically many concepts that are important within the world of finance such as scarcity. The mentioned opportunity cost and many others such as the economy of scales and how efficient productivity can be.

What Happens if you Move Out?

If in the graph the production possibilities frontier shows an outward shift in fact they are good news. Since it means that a greater capacity to produce the goods that have been proposed in that time. These thanks to the technology that can allow better fertilize the land and obtain better raw material or a better plantation.

If on the other hand it moves inwards, this means that production capacity is reduced. Moreover generally due to a shortage related to the necessary materials. Nor to the inclement weather and natural phenomena.

What is the Shape of the Border?

The form that has the production possibilities frontier will be related to what represents the opportunity cost. In this way a line can be observed a curve in the graph as the case may be. Therefore the frontier of production possibilities can be displaced. Hence in this way reach and in this way reach points that were unattainable.

What Happens if you Do Not use all the Resources?

This would maintain the production possibilities frontier, within possible standards. However it would be considered inefficient, when there are improvements at a technological or labor level. The production possibilities frontier will move to the right. This means that the quantity of resources will move in one direction or another the projection of the line.

Economic Growth and the PPF

We have already mentioned the importance of resources. So that the production possibilities frontier is positive. These are especially important in the case of countries. Specifically it is one of the areas where this model is most applicable.

With respect to PPF, economic growth means that PPF will expand which translates as greater capacity to produce. This can also mean an increase in the production of capital goods, leaving aside or sacrificing the production of consumer goods.

In any country, the higher its PPF, the faster growth rate. However, many poor countries do not grow at the same speed as developed countries. This is because their production must go to consumer goods and to maintain the population.

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Basic Elements within the PPF

First, resources that are vital to produce any good, resources do not necessarily have to be economic. They can also be natural resources, workers that are a very important resource in production or technology.

Needs are another especially important concept in the PPF, as we mentioned with respect to the poorer countries. Basically whose needs in many ways prevent their growth and that are closely related to goods since the goods are those that meet the needs.

Importance of PPF in Today’s World

Every day it becomes more evident that the needs in the world are endless and with limited resources it is necessary to invest them efficiently or the collapse of society will be imminent. Many well-known scientists assure that it is necessary to get where to extract new resources, such as minerals and water in the next hundred years so that the planet earth does not condemn.

This is where the PPF appears, since it helps to predict which the best way to invest the resources is . We must take into account different factors that we have already mentioned.

Consumption Possibility Frontier

This point is also very important within the PPF and is formed with the combination of goods that can be acquired with the income and the prices related to these goods. Shows purchase choices based on revenue. There are many elements that form this important model for the study of production and the most favorable investments, which are necessary to understand in the globalized world where every day we participate in one way or another of the economy.