Production Possibilities frontier

One of the central principles of economics is that everyone faces tradeoffs because resources are limited. These tradeoffs are present both in individual choice and in the production decisions of entire economies. The production possibilities frontier (PPF, also sometimes called a production possibilities curve) is a simple way to show these production tradeoffs graphically.

Since graphs are two-dimensional, economists make the simplifying assumption that the economy can only produce two different goods. Traditionally, economists use guns and butter as the two goods when describing an economy's production options, since guns represent a general category of capital goods and butter represents a general category of consumer goods.

Combinations of output that are inside the production possibilities frontier represent inefficient production, since an economy could produce more of both goods (i.e. move up and to the right on the graph) by reorganizing resources. On the other hand, combinations of output that lie outside the production possibilities frontier represent infeasible points, since the economy doesn't have enough resources to produce those combinations of goods. Therefore, the production possibilities frontier represents all points where an economy is using all of its resources efficiently. A production possibility frontier (PPF) is a curve or a boundary which shows the combinations of two or more goods and services that can be produced whilst using all of the available factor resources efficiently.