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MBA Help - Economics

The Production Possibility Frontier

Production possibility frontiers occur whenever a producer is able to produce a limited amount of a combination of goods. For example, a car manufacturer which produces a small car and a large car may find that, in a given period of time, it can produce 200 small cars or 100 large cars. However, it cannot produce both of these at the same time. Therefore, for every one large car it makes it is unable to make two small cars. This means that its maximum production capacities for a variety of combinations of cars will be:

Small

Large

200

0

150

25

100

50

50

75

0

100

This can be represented graphically and, when done so, produces a curve known as the production possibility frontier:

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The production possibility frontier is the line connecting all potential combinations of output that the producer can produce, assuming that they work to full efficiency and all factors of production are exploited to their full potential. The company could make 50 small cars and 25 large cars, for example, but this would not fully exploit all factors of production: the company would have spare capacity. In addition, the company could not make 100 small cars and 75 large cars, as this is above the level of the curve, and hence is beyond the production possibility frontier.

In the example above, the frontier is linear, but in real life economies of scale and the principle of increasing cost will tend to result in a curved frontier. This is because when only small amounts of one product are being produced, economies of scale considerations will tend to make this less efficient than when a reasonable number are being produced. In addition, some factors of production will tend to be suited to producing only one type of good. So, attempting to produce a large number of one type of good will not necessarily be the best use of all factors. Therefore, the opportunity cost may increase as you approach the ends of the curve, thus making the extremes of production less efficient than a balanced production profile. Indeed, it is only for very similar products that the frontier will be a straight line, for most products it will be a curve.

Other economics sections:

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