Question

1a. What is a Production Possibilities Frontier (PPF)? Consider an economy with only two goods: guns and butter. Show the tradeoff between the production of guns and the production of butter by drawing a (bowed outward) PPF (use gun production on the horizontal axis and butter production on the vertical axis). b. In what ways does the PPF reflect: i. scarcity and choice; and ii. increasing opportunity cost? c. How would the PPF be affected by a technological improvement in the production of guns?

Answer 1

a)

A production possibility frontier (PPF) is a curve that depicts the maximum combination of two goods that can be produced in an economy using the factors of production. It is also known as a production possibility curve or a production transformation curve.

The diagram below depicts the PPF for the economy producing guns and butter. An increase in the production of butter leads to more resources being sacrificed from gun production. This increasing marginal opportunity cost (i.e. more and more guns being sacrificed for the production of more butter) leads to the bowed shape/concave shape of the PPF.

b)

i) Scarcity and choice are depicted by all the points along the PPC i.e. due to the presence of scarce resources, the economy has to make a choice between the production of two goods.

ii) Increasing opportunity cost is depicted by the bowed-out / concave shape of the PPC

iii) Advancement in technology will lead to a rightward shift in the PPC, thus depicting more of both the goods being produced with the same scarce resources.