When a company chooses to measure how much of two goods it can produce, it creates a production possibility graph. This chart is also termed a “production possibility frontier,” or, PPF. When making this graph, a business considers many variables: Its access to resources, strengths and skill set. Because a company’s ability to produce two distinct items is not always equal, the chart reveals a bowed-shape curve instead of a linear function.
A production possibilities curve outlines the relationship between a company’s choices in the production of two items. One end of the axis reveals the quantity produced if the business allocated all of its resources to making that particular good. The other axis shows how much of an item can be produced if its resources were allocated to the production of the second good. The bow-shaped, downward-sloping line shows how much of both items could be produced given its distribution of resources.
How much of either good the company chooses to make depends on a number of economic factors. Such factors include the ability of a competitor to make a competing good, consumer demand and the business’s own skill set and availability of resources.
Factors for Bow Shaped
The curve is bow-shaped for a few reasons. John Taylor, author of the textbook “Economics,” explains that one reason for the bowed out shape of the graph is because of the business’s opportunity cost undergone as a result of switching production from one good to the next. Reallocating capital, such as labor and machinery, toward the production of a new item is often costlier than producing just one item. A business also achieves economies of scale when it focuses exclusively on its core competencies, thereby improving its ability to produce just one item instead of a combination of two.
A PPF indicates the points at which the business is producing goods most efficiently. Any point along the curve shows efficient production, whereas any point outside of the curve indicates that the business could allocate resources in a way that better serves it. To produce at a point on the curve, the business typically shifts its resources away from producing one good and more to the second good. John Leach, author of “A Course in Public Economics,” explains that the marginal rate of transformation reveals the slope of the curve. The rate of transformation changes depending on the current production schedule. If, for instance, the business produces almost entirely on its bread production, making one unit of cheese requires expending more resources than if it produced a mix of the two.
The PPF may retract or expand depending on circumstances. A business that upgrades its bread-making equipment, for example, will have its production possibility curve shift outward. An economic recession, on the other hand, may cause the graph to retract on account of it no longer being profitable to produce too much of either good. Thus, the PPF is a dynamic, ever-changing tool.
Since 2008 Catherine Capozzi has been writing business, finance and economics-related articles from her home in the sunny state of Arizona. She is pursuing a Bachelor of Science in economics from the W.P. Carey School of Business at Arizona State University, which has given her a love of spreadsheets and corporate life.