Production possibility frontiers

Drawing a PPF

A PPF shows the maximum combinations of two goods (or types of good) an economy can produce with all its resources fully and efficiently employed, given its technology.

Diagram in words: put one good on each axis, for example capital goods on the horizontal axis and consumer goods on the vertical axis. Draw a curve bowed outwards from the origin (concave to the origin), running from the vertical axis to the horizontal axis. Mark three points: A on the curve (efficient), B inside the curve (inefficient: unemployed or wasted resources) and C outside the curve (unobtainable with current resources and technology).

Opportunity cost and the shape

Moving along the PPF means reallocating resources from one good to the other. The opportunity cost of more of one good is the amount of the other given up.

Marginal analysis: opportunity cost per extra unit = units of Y given up / extra units of X gained.

The curve is bowed outwards because resources are not equally suited to every use. The first resources moved into capital goods are those best at making them, so little consumption is lost. As more are moved, less suitable resources are used and the opportunity cost rises. A straight-line PPF means a constant opportunity cost (resources equally good at either).

Shifts and movements

• Movement along the PPF: a change in the mix of output, caused by reallocating resources (for example a government decision to spend more on defence).
• Movement from inside to the curve: using unemployed resources, for example a fall in unemployment. This is actual growth without any change in capacity.
• Outward shift: an increase in productive potential, caused by more or better resources: investment in capital, new technology, a larger or more skilled labour force (education, migration), discovery of natural resources.
• Inward shift: a fall in productive potential: natural disaster, war, emigration of skilled workers, depletion of resources.
• A pivot (one end moves out) shows an improvement affecting only one good, for example new technology in agriculture.

Capital goods, consumer goods and growth

• Consumer goods satisfy wants directly now: food, phones, haircuts.
• Capital goods are used to produce other goods: machinery, factories, roads.

An economy that chooses more capital goods today sacrifices current consumption (the opportunity cost) but raises productivity, so its PPF shifts further outwards in future. An economy that chooses mostly consumer goods enjoys more now but grows more slowly. Evaluate: the gain depends on the quality of investment and whether people can afford lower consumption now, especially in a poor economy.

Worked example

An economy's PPF passes through these points (capital goods, consumer goods): A (0, 100), B (20, 90), C (40, 70), D (60, 40), E (80, 0). It moves from 40 to 60 units of capital goods. Find the opportunity cost per extra unit of capital goods.

1. Consumer goods fall from 70 to 40: 30 units given up.
2. Extra capital goods: 20.
3. Opportunity cost = 30 / 20 = 1.5 consumer goods per capital good.
4. Compare 0 to 20 capital goods: only 0.5 per unit. The cost rises, which is why the PPF bows outwards.

Answer: 1.5 units of consumer goods per unit of capital goods.

Check yourself

1. Using the PPF through A (0, 100), B (20, 90), C (40, 70), D (60, 40), E (80, 0) (capital goods, consumer goods), find the opportunity cost per extra unit of capital goods when production of capital goods rises from 60 to 80.
   Show answer

   2 consumer goods. Consumer goods fall by 40 for 20 extra capital goods: 40 / 20.

2. A country can produce either 500 tonnes of rice or 250 tonnes of cotton with all its resources, and its PPF is a straight line. What is the opportunity cost of 1 tonne of cotton, in tonnes of rice?
   Show answer

   2 tonnes of rice. All 500 rice is given up for 250 cotton, so 500 / 250 = 2 tonnes of rice per tonne of cotton. A straight line means this cost is constant.

3. A point inside the PPF shows that
   • some resources are unemployed or used inefficiently
   • the economy is producing the maximum possible output
   • the output combination is unobtainable
   • the economy has experienced economic growth
   Show answer

   some resources are unemployed or used inefficiently. Output could rise without giving up anything, so resources are being wasted.

4. Which would shift a country's PPF outwards?
   • A fall in unemployment
   • A switch of resources from consumer goods to capital goods
   • A rise in the price of consumer goods
   • An improvement in technology used across industry
   Show answer

   An improvement in technology used across industry. Better technology raises productive potential.

5. Why is a PPF usually drawn bowed outwards (concave to the origin)?
   • Opportunity cost is constant
   • Resources are not equally suited to producing each good, so opportunity cost rises
   • Technology improves as output rises
   • Consumers prefer a balance of the two goods
   Show answer

   Resources are not equally suited to producing each good, so opportunity cost rises. Increasingly unsuitable resources are switched, so each extra unit costs more of the other good.

6. Which is a capital good for a bakery?
   • A loaf of bread sold to a customer
   • Flour used in today's bread
   • The baker's holiday
   • An industrial oven
   Show answer

   An industrial oven. An oven is a man-made aid to production used over many periods.

7. Explain why an economy that produces more capital goods today may achieve faster economic growth in the future. Refer to the PPF.
   Show answer

   Producing more capital goods means giving up some consumer goods now (an opportunity cost, a movement along the PPF). The extra capital raises productivity and productive capacity, so the PPF shifts outwards further in future.. Movement along now, outward shift later.

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Sources

• Pearson Edexcel International Advanced Subsidiary/Advanced Level in Economics specification (2018)

Last updated 8 November 2026. Spotted a mistake? Tell us.