Drawing and reading the production possibility frontier

Overview

Point on a production possibility frontier represent, what a point beyond the production possibility frontier represents and actual growth and potential growth using a production possibility frontier.

What you need to know

Answer each one before you reveal it.

Questions from this subtopic

Each one with the model answer underneath.

1. 1

   Describe how to draw a production possibility frontier for an economy producing capital goods and consumer goods, naming the axes.

   Model answer

   Put the quantity of capital goods per year on the vertical axis and the quantity of consumer goods per year on the horizontal axis. Draw a curve from a point on the vertical axis, where all resources make capital goods, down to a point on the horizontal axis, where all resources make consumer goods, bowing outwards away from the origin. Every point on the curve shows a combination of the two goods that uses all available resources fully and efficiently with existing technology.

2. 2

   What does a point on a production possibility frontier represent, and what does a point inside it represent?

   Model answer

   A point on the frontier represents a combination of outputs that the economy can just achieve when all its resources are fully employed and used as productively as possible, so it is productively efficient. A point inside the frontier represents a combination that leaves some resources unemployed or badly used, so more of one good could be produced without giving up any of the other.

3. 3

   Explain what a point beyond the production possibility frontier represents.

   Model answer

   It represents a combination of outputs that is unattainable with the economy's current stock of resources and current state of technology. Such a point can only be reached if the frontier itself moves outwards, which requires more resources, better resources or improved technology. It cannot be reached simply by trying harder or by reallocating existing resources.

4. 4

   Why is a production possibility frontier usually drawn bowed outwards rather than as a straight line?

   Model answer

   It is bowed outwards because resources are not equally suited to both uses. As an economy switches production towards one good, it must transfer resources that are progressively less well suited to it, so each extra unit of that good costs more and more of the other. This increasing opportunity cost makes the curve steepen as it moves along, producing the outward bow.

5. 5

   Under what condition would a production possibility frontier be a straight line, and what does the slope then tell you?

   Model answer

   It is a straight line when resources are equally productive in both uses, so switching them costs the same amount of the other good throughout. The slope then measures a constant opportunity cost: if the line falls by two units of good X for every one unit of good Y gained, the opportunity cost of one Y is always two X, regardless of the combination currently produced.

6. 6

   Explain the difference between a movement along a production possibility frontier and a shift of the frontier.

   Model answer

   A movement along the frontier is a reallocation of the existing resources between the two goods: more of one is produced only by producing less of the other, and total productive capacity is unchanged. A shift of the frontier is a change in that capacity itself, caused by a change in the quantity or quality of resources or in technology, so combinations that were previously impossible become achievable. Movements involve a trade-off; outward shifts do not.

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