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The Production Possibilities Frontier (PPF)

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You might have heard economics is full of models. That's true. Unfortunately, they're not attractive super models, let alone toy train models, nope economics is full of graphical models 📈 as 'simplifications of reality'. Sort of like how the Hong Kong MTR 🚇 map doesn't show you every single street, but it does show you how to get from Causeway Bay to the airport. It's all about simplification - cutting out the noise.

 

One of the first models you'll need to learn in economics is the PPF, the Production Possibilities Frontier. This model is the epitome of simplification. You take an entire economy and simplify it down to the maximum production of two goods. Sushi and ramen...

🍣🍜 Yay!

 

You can define the PPF as "a graph that shows the maximum combinations of two goods or services an economy can produce, given its resources and technology". It's also sometimes called the PPC, the Production Possibilities Curve. As exciting as it sounds. 🫠

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Out on the Frontier 🤠

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The PPF can be used to outline a number of key economic concepts including:

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*Scarcity - limited resources = choices 🍣🍜🤔

*Trade-offs - more sushi 🍣 = less ramen 🍜

*Opportunity Cost - choosing 🍣 costs the other 🍜

*Growth: better tools = bigger curve 🍣🍜🍣🍜🍣🍜

*Decline: disaster shrinks the curve 🔥

*Efficiency: on the curve = no waste 🍣 ✅ 🍜  ✅

*Gains from Trade: specialization allows options

🇯🇵: 🍣🍣🍣🍣🍣🍣🍣🍣🍣🍣🍣🍣🍣

🇭🇰: 🍜🍜🍜🍜🍜🍜🍜🍜🍜

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How It Works

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On the diagram you have two axes, that's where you can keep track of how many goods are produced.

 

Imagine you are a Japanese restaurant manager and you can decide that your chefs 👨🏻‍🍳👨🏻‍🍳👨🏻‍🍳 either make all sushi 🍣🍣🍣, all ramen🍜🍜🍜, or some combination of both🍣🍣🍜. But because of scarcity, there's only a limited number of hours in a day so you have to choose some allocation along the line. 

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The model also shows trade-offs because the more time your chef makes sushi, the less time they have to make ramen. Economics is all about trade-offs - there are no perfect solutions (infinite sushi and ramen hurts my tummy). 😣 Recall opportunity cost - the value of the next best alternative foregone. The slope of the PPF shows the opportunity cost, and it can be increasing, decreasing or constant. 

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The PPF can also shift out with more resources or technology or a better sushi slicing knife 🔪 Economic growth! 🤩 More sushi AND more ramen? 🍣🍣🍜🍣🍣🍜🍣🍣🍜 Don't mind if I do. The bad news is it can also shift in, like due to a restaurant fire. 🔥 Don't overheat your wok silly, keep it chill to avoid the thrill. 

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The PPF can also be used to shown efficiency vs. inefficiency. Any allocation along the PPF is efficient, but any allocation underneath the curve is inefficient. That's not a restaurant fire. That's a lazy chef.👨🏻‍🍳💤

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However there are also impossible allocations. Those are allocations beyond the PPF. Technically they aren't impossible though, because if two economies to specialize and trade you can actually get there. Basically let Japan make the sushi and Hong Kong can make the ramen (or in real life, Japan can make the sushi and Hong Kong can make the financial products). 

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🇯🇵: 🍣🍣🍣🍣🍣🍣🍣🍣🍣🍣🍣🍣🍣

🇭🇰: 🍜🍜🍜🍜🍜🍜🍜🍜🍜

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The Possibilities are Infinite! Sort of. 

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The PPF is a fun model because it simplifies the real world, and can be used to show key economic concepts. It's also foundational for understanding a whole bunch of other models. We could possibly simplify down to a one good model, instead of putting ramen on the y-axis we could put a symbol there to represent all the other goods and services you could buy. 

 

🚗🏠📱📚🛋️💎🎨🎮✈️🖥️🍔🍟🌭🍕🌮🍩🍪🍦🍫🥤= ?

 

If only there was a symbol of the ability to purchase all other goods and services, like a symbol of capitalism itself. Hmmm. Would pay a lot of $ for that. Can you guess what it is for a few dollars off on your next tutoring lesson?​

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Special thanks to Austin Yoo (Seoul) for his contributions to this topic.