Introduction to Economics

The Production Possibility Frontier

It is possible to represent the concept of opportunity cost on a simple graph. Economists refer to this graph as the Production Possibility Frontier. This graph shows us the consequence of the choices that we are forced to make because of the scarcity of our resources.

For any country, they are able to supply both goods and services. They can not, however, supply an unlimited quantity of these things. Because countries need both goods and services in order to survive, they must make choices about the balance between the two. If we want to make more goods, then we must sacrifice some services. We can represent this on a graph that looks like this:

You will note that on this graph there are three letters. The letter "A" refers to a situation in which our productive resources are not being fully utilised. For example, if we have some people who are unemployed, then it is possible for us to have more goods and more services. If we have some land that is not being used, then once again we have resources that are not being fully utilised. Every country in the world operates somewhere inside the curve.

The letter “B” refers to a theoretical situation in which it is possible for us to use all of our existing resources in some way. At this point, we are gaining as many goods and service as we can from the resources that we have available.

The letter “C” is, at this stage, impossible for us to achieve. This is a situation in which we could have more goods and more services. There are two ways in which this goal can be achieved; either the country needs to gain access to more resources, or we need to use the resources that we have more efficiently.

Efficiency is another key economic concept. Let’s return to an earlier example: previously we suggested that if we had some timber we could use it to make either one table or four chairs. If I was able to increase my efficiency, I might find a way to use the same timber to make five chairs instead of four. This might be because I cut the timber in a different way, and so I don’t end up with as many off-cuts. This is an increase in efficiency – I have allocated the same resources in a different way, and I have ended up with more goods. In this case, I have one extra chair.

Current Page: The Production Possibility Frontier