Suppose a new technique was discovered that allowed the wine producers to double their output for a given level of resources. Production possibility curve is a graphical presentation of alternative production possibilities facing an economy. Experienced wine producers are not necessarily efficient grain producers, and grain producers are not necessarily efficient wine producers, so the opportunity cost increases as one moves toward either extreme on the curve of production possibilities. In this example, some factors of production are suited to producing both wine and grain, but as the production of one of these commodities increases, resources better suited to production of the other must be diverted. As more of one product is produced, increasingly larger amounts of the other product must be given up. The principle of diminishing marginal returns implies that the production possibilities frontier is concave toward the origin, which is equivalent to increasing opportunity cost. The shape of this production possibility frontier illustrates the principle of increasing cost. Using the production possibilities frontier as a method to show how the allocation of economic resources changes the economic output of any society. The boundary of the production possibilities set is known as the production possibilities frontier. A combination outside the curve such as point b is not possible since the output level would exceed the capacity of the economy.
The economy could choose to operate at less than capacity somewhere inside the curve, for example at point a, but such a combination of goods would be less than what the economy is capable of producing. It can be used as a decision-making tool by managers.
#PRODUCTION POSSIBILITIES FRONTIER FULL#
The PPF shows all efficient combinations of output for this island economy when the factors of production are used to their full potential. A production possibilities frontier (PPF) is a microeconomic concept that defines all of the possible combinations of goods that a business can produce, given some finite resource.
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