Question

Compare and contrast, and provide real world examples to demonstrate the similarities and differences between the Production Possibilities Frontier Model to the Consumer Budget Constraint Model.

Answer 1

Production possibility frontier model : This model describes the various possibilities of output of two different commodities in an economy. It is influenced by the factors of production such as land, labour, capital and technology. The PPF model is described in the form of a curve wherein the increase in the production of a product will mean reduction in the output of the other commodity. It is concerned with the oppportunity cost (i.e) the organisation or nation must go for the best alternative between the two products as the resources in an economy are limited.

Consumer Budget Constraint Model: Budget constraint is a consumption option available to a consumer with limited amount of money available to spend on different commodities. It is important to note that it is not a matter of preference or behaviour as the consumption pattern is determined by the budget constraint. Unlike the PPF model which deals with the choices of production of a producer, the Consumer Budget Constraint Model deals with the choices of consumption of a consumer.

Real world examples of PPF and Budget Constraint Models--

In an economy with limited resources the producer has to choose how much resource to allocate between commodities. For example a nation A has to allocate resources for the production of guns and bread. Let us assume for the sake of understanding that nation A's economy produces only the above mentioned products. In order to produce guns it has to sacrifice bread and vice versa.

Consumer Budget constraint:

Let us assume that a person named John has an income of $100 and he has to make a choice between loaves of Bread and Chocolate. Assuming a loaf of bread is $5 and a chocolate is $10 there a number of ways he can allocate his income towards the consumption of these products. They are given below in a tabular format.