Production Possibility Frontier - PPF

And finance Allah Shmoop What is the production possibilities Curve

Okay people Maybe Willy Wonka was onto something And with

all that pure imagination talk the people in charge of

making stuff have to survey their production like you know

your dog's surveys the yard every morning as if she's

never seen it before You're imagining all the possibility to

make more of this for more of that Yes well

but of course firms aren't imagining that can make unlimited

amounts of stuff They're imagining riel possibilities Things they could

do with the resources they have on hand Will this

imaginary world too constrained Fourth fun stuff like triple rainbows

unicorns and trees that grow video games is the stuff

of the production possibilities curve Will the production possibilities curve

also known as the production possibilities Frontier shows the different

combinations of two goods that can be made with a

given bucket of stuff we already have Like labor inputs

hardware all that stuff We'll call it the PPC for

short To save ourselves You know some precious breath Well

the PPC usually looks like this kind of bowing out

there Yeah on the X axis is one good and

the Y axis Another good So every point on this

graph not just the curve The whole box is a

different combination of two things The curve tells us what

our best options are Well in the nineteen nineties there

was a prankster company called Texcoco The name alone messed

with people which made fake mustache is and whoopee cushions

in its factory using things like rubber glue plastic labor

and capital Yeah all that factory equipment stuff Well Texaco

had some decisions to make It could make only fake

mustache is with resource is on hand which would result

in the production of one hundred mustache Is it Could

also on ly make whoopee cushions like Texaco could make

a thousand whoopee cushions if it only dealt in the

whoopee cushion underground Are you know market Or maybe it

could make mostly whoopee cushions like nine hundred of them

And some mustache is Well let's see if we can

make a nine hundred What big oceans that leaves enough

resource is for twenty five Fake mustache is Yeah And

all these production options are options on our PPC This

thing Well why do economists go with a fancy shmancy

curve over a boring table Well tables are hard to

look at All those numbers air dizzying you know and

economists are on the brink of a heart attack all

the time anyway thanks to those boom and bust cycles

But that's another story A curve is a nifty tool

because it shows us all of that info without all

the numbers It's also handy because unlike a table a

curve is continuous Justus There are an infinite number of

numbers between zero and one right It's continuous if we

missed an option in our table while we won't miss

it in the curve because while it will be part

of the curves it's all the little dots in here

We also like the curve because it tells us things

like a fortune teller you know but accurate For instance

all of our most efficient production possibilities are on the

curve Efficiency here means Bobby Joe and William Jr The

fifth are pumping out Moustache is and will be cushions

using their work time to be as productive as possible

Save the Hanji time for lovers Lane Yeah okay Well

yeah they're not only being diligent workers on the clock

but are also using the rubber and glue and things

to the utmost capacity wasting as little as possible Yeah

it's a scarce world out there Well basically a firm

is getting the most bang and not the lover's lane

kind for its buck when production is efficient And that's

when we're walking the line of the PPC So what

if Bobby Joan William Jr The Fifth we're wasting time

making intense eye contact from across the factory floor Well

they're wasting time and letting glue fall to the floor

causing all kinds of waste and problems that will take

time to fix Yeah it's pretty bad Which would mean

Texaco is producing somewhere under the curve Not the best

use of our scarce resource is Well Texaco must do

its best to bring its pranks to the prankster of

the nineties Yeah What about this area over the curve

The land of unicorns and video game fruiting trees The

land of Well just not gonna happen Makes sense because

at the line we're already doing as much as we

simply can With the little we have we're at one

hundred percent We can't be doing one hundred eighteen percent

of our capacity right Well there's one case where we

could produce outside the curve If some of Bobby Joe

and William Juniors labor was replaced with robots that made

the stash is and cushions more efficiently while our curve

would shift outward It's just what technological innovation does It

helps us make things better than before Well the curve

also shows trade offs and opportunity costs You know the

reason we have to choose one option Things are limited

It shows that if we started making on ly whoopee

cushions while we can make a thousand if we put

all the resource is into just making those you know

remember we can trade off one hundred whoopee cushions to

make twenty five Moustache is it's kind of our equation

making nine hundred cushions and twenty five stashes instead of

a thousand and zero That's an opportunity cost of those

hundred whoopee cushions Twenty five Moustache will give a little

of one thing to get a little of another thing

The market you know where pranksters run rampant will help

companies like Texaco figure out which point on the PC

is their best bet Okay people to recap the production

possibilities Frontier shows us all the options for producing two

things as efficiently as possible With the scarce resource is

available It shows us things like our trade offs and

opportunity costs unfortunate things firms have to face in real

life because yeah there's scarcity People sees curve outward like

that because our trade offs aren't one toe one Our

opportunity cost increases We trade off one thing for another

moving along the curve Well the graph is better than

the table because we can literally see what the production

possibilities are how they're efficient and all that and which

ones are impossible Yeah And then of course the inefficient

ones that live down there Alright Yeah and we're looking

at you Bobby Joe Come on man Get your shoe

out of the glue before it hardens there When we

replacing you with a robot let's get back down Yeah