Production Possibilities Frontier: Definition and Uses

By Indeed Editorial Team

Published 23 October 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

The production possibilities frontier (PPF) is a metric that people in the manufacturing industry use to compare the productivity and efficiency levels associated with creating goods or services. Companies can use the PPF to determine how to allocate limited resources, and economists can use it to evaluate countries' economic output. Learning more about the PPF and how to use it can help you determine how certain factors might affect production. In this article, we explain what the PPF is, discuss its uses, provide a guide to interpreting the PPF, highlight its advantages and limitations and offer an example.

What is the production possibilities frontier?

The production possibilities frontier is a statistical curve on a graph that depicts the possible quantities of two products that you can produce if both depend upon the same materials or resources for production. The curve helps represent the most efficient levels of production for two different products using the same resources while also accounting for the opportunity cost of both outcomes. Opportunity cost represents the forgone profit from choosing one alternative over another.

A change in the PPF may indicate an increase or decrease in business growth. Companies deciding how much of each type of product to produce can use the PPF to plot points on a graph and evaluate the number of available resources. In economics, the PPF represents the economic quantities requiring the same type and level of resources to manufacture. As with a business, a change in the curve may represent an increase or decrease in overall economic output. Economists can use it to evaluate how efficiently economies are able to use limited resources to sustain their growth.

Related: What Is a Production Possibilities Curve? (With Explanation)

PPF for businesses vs. economies

The PPF assumes that businesses and economies experience trade-offs when producing two different goods using the same array of limited resources. For businesses, you can plot a point for each time you take resources from one product and allocate them to the other. The difference between the X and Y curves on the graph represents the PPF. Any area below the curve represents goods that aren't currently in use, and any area above the curve represents the number of production possibilities available. Companies can use the PPF to determine which of their products is the most profitable.

For an economy, financial analysts and economists might use the PPF to determine the points at which a company allocates its scarce resources most efficiently. The production of one product may decrease the production of another, and by evaluating the curve, economists may be able to determine the ideal allocation. For example, if the economy is producing less than the quantities that the curve indicated, economists can determine that it isn't using resources in the best possible way. They can then decide how to increase the production of some goods to maximise resource efficiency.

Related: Economic Theory: 7 Theory Types for Aspiring Economists

How to interpret the PPF

To interpret the meaning of the PPF after analysing two products or services, consider engaging in the following four steps:

1. Assess the X-coordinate

The X-coordinate is on the horizontal axis of a graph, and it represents the PPF curve. As you assess the graph from left to right, the X-coordinate demonstrates the horizontal increase, and the further right it is, the more of the first product you have. For example, if you're evaluating the PPF for a company that produces two distinct types of baby food using the same materials and equipment, the first baby food represents the horizontal axis and the total amount of baby food the company produces becomes the X-coordinate.

Related: 15 Types of Graphs and Charts (With Examples)

2. Locate the Y-coordinate

Once you determine the X-coordinate, assess the Y-coordinate by locating the graph's vertical axis. This coordinate increases from the bottom to the top of the line, and the topmost values represent the highest levels of output for the other product. The second type of baby food represents the Y-coordinate, and the closer the coordinate to the vertical axis, the more resources you allocate to baby food production. The fluctuation between the two values contributes to the trade-off in production growth or decline, and you can use it to make more informed production decisions.

3. Determine the rate of change

The rate of change represents how one quantity changes in relation to another, and it can either be positive or negative. The rate of change as it relates to PPF represents the percentage of increase or decrease that one product experiences because of a change in the resource allocation of the other. To determine the slope, you can compare the X and Y coordinates on the PPF curve and evaluate the difference between each. For example, if your first X-coordinate is an eight and your second is a four, you'd be able to determine a difference of four.

You can then repeat the process for the two Y-coordinates. Divide the difference of the Y coordinates you identified by the difference of the X-coordinates to determine the percentage change. For example, if your Y-coordinate is two, you'd calculate a percentage change of 50%. This percentage can inform you that there's a 50% increase or decrease in one product as the production of one product increases or decreases.

Related: Percentage Difference vs. Percentage Change: Here's the Difference

4. Evaluate the opportunity cost

The rate of change can inform you of the total opportunity cost of producing one product instead of the other. For example, with a slope of one-half or 50%, it would be necessary for you to stop producing 50% of one product to produce 50% more of the other product. This means that the opportunity cost for the other product increases by 50% when you allocate more resources towards its production. When you increase production for the other product, the opportunity cost also increases by the same amount, causing an equal decrease in the opportunity cost for the first product.

Related: What Is Cost Accounting? (Plus Different Types of Costs)

Advantages of the PPF

By analysing the opportunity cost, you can determine the costs and benefits of each option more easily. This can help you create a more detailed budget when determining how much to allocate to each product line or individual product. Here are some of the primary advantages of the PPF:

  • It helps maximise profits. By making it easier to determine how to allocate resources, the PPF can help companies in a wide range of industries maximise their profits and use each resource as efficiently as possible.

  • It makes assessing economic activity easier. The PPF helps economists better understand a country's economic output, allowing them to develop better policy recommendations for supporting economic growth.

  • It helps with determining production limits. The PPF can make it easier to determine the production limits of a company, which can help that company achieve optimal allocation efficiency and avoid overusing finite resources.

Related: What Is Mass Production and How Does It Work? (With FAQs)

Limitations of the PPF

The PPF can be useful for determining how to optimise resource allocation, but it does have a few limitations that can be important to consider. The limitations of the PPF include:

  • It assumes technology is constant. By assuming that technology is constant and unchanging, the PPF doesn't account for how certain technologies can increase efficiency and improve production levels.

  • It doesn't account for changing techniques. The PPF also doesn't account for changing techniques that may result in more efficient ways to produce goods and utilise resources.

  • It has limited uses. Companies that produce three or more products that each compete for the same resources are often unable to use the PPF and may instead rely on more complex statistical models.

PPF example

Here's an example of how a company might use the PPF:

Sky Blue Manufacturing produces a variety of refrigeration equipment, including two distinct shelves for commercial and residential use. Since both shelves require the same resources, the company decides to use the PPF to assess the efficiency of both production processes. The company creates a graph where commercial refrigeration shelves represent the X-axis, and residential refrigeration shelves represent the Y-axis. If Sky Blue Manufacturing decided to only produce shelves for commercial use and none for residential use, it would create the coordinates (100, 0).

The X-coordinate of 100 represents the maximum total output if the company used all available resources for just one product. As the company begins producing more residential shelves, the X-coordinate begins decreasing. Increasing the production of residential shelves by 40 creates the coordinates (60, 40). The difference represents the maximum output level of 100 total units, assuming that Sky Blue Manufacturing can use all its resources.

Explore more articles