PPF

Production Possibility Frontier

This table is a numerical representation of the Production Possibility Frontier. PPF represents the efficient combinations of quantities of bread and cloth that can be produced with given quantities of capital and labor.

Allocation of labor and capital and choice of technology must be done in such a way, that it would be impossible to increase output of one good without reducing output of another.


Production Possibility Frontier or PPF captures only part of economic efficiency, namely efficiency in production. This efficiency involves only two of the three decision tasks: optimal allocation of scarce resources and optimal choice of technology. It is defined similarly as Pareto efficiency:
PPF is the white curve	yellow area represents inefficient "baskets" of bread and cloth
blue area are baskets that cannot be produced with existing resources and technologies.

FOR THOSE WHO ARE NOT AFRAID OF MATHEMATICS!

The PPF of this example was calculated from a simple mathematical model with the so called Cobb-Douglas production functions of the form:

Y = aK^bL^1-b

^{It
was assumed, that the production functions for both bread and
cloth have the same form, however with different numerical
values of parameters.}

^{The variables were}

^Y	^output
^K	^capital
^L	^labor

^{parameters were}

a	factor productivity
^b	^{capital elasticity of output}

It was also assumed that total quantities of labor and capital were

^{In the following table subscripts b and c indicate bread and cloth}