A production possibility Frontier is a curve showing all maximum output possibilities for two goods. It also gives an answer to our question – “what is our maximum production capacity?”.
Understanding PPF with an example
When we say maximum production, I will give an example what I mean. Let’s take an example of Samsung electronic devices. We will take two samsung top products. One is the Samsung Note 8 (67,900/-) and the other one is Samsung Galaxy S8 (57,900/-). Suppose the goal is to produce as many of these two Samsung electronic devices as possible with the available resources. This means creating as many Note 8 and S8 phones with Samsung’s available resources.
This move will maximize the availability of Samsung Note 8 and S8 in the market and minimizes unused resources. Now it is usually impossible to achieve this ideal state, but companies like to have it as an ultimate goal.
Now let me show you the production possibility Frontier for these two devices on a graph. The X-axis represents production of Samsung note 8 phones and the Y axis represents production of Samsung S8 phones. Let’s keep it simple and allot 100 units to both the Y and X axis.
If Samsung uses all its resources (labor & capital) to produce only Samsung Galaxy S8 phones then it makes 100 units of Samsung Galaxy S8. But if it uses all its resources to product only Samsung note 8 phones, then it will produce 80 units of Samsung note 8 (*reason the cost of Samsung note 8 is higher).
Now let’s assume if Samsung uses half of its resources then it can produce 50 units of Samsung Galaxy S8 and 40 units of Samsung note 8.
Let’s take another assumption. If Samsung uses 3/4th of its resources on Samsung Galaxy S8 then it produces 75 units of Samsung Galaxy S8 and if it used 1/4th of its resources on Samsung note 8 then it produces 20 units of Samsung note 8.
Now, connect all the dots on the graph. These dots indicate maximum production with given factors. You will get the production possibility frontier. As a decision maker, you will have to play around within this area for an efficient production of Samsung Galaxy S8 and Samsung note 8.
Anything beyond this area is unattainable due to limited resources. Resources within the production possibility frontier curve is not utilized fully. It is usually impossible to achieve this ideal state, but companies like to have it as an ultimate goal.