The Production Possibilities Frontier (PPF) is a graph that illustrates the maximum possible output combinations of two goods that can be produced with limited resources. The PPF is typically bowed outward, and this shape can be explained using a simple example.
Imagine an economy that produces only two goods: bread and butter. Initially, assume that the economy has a certain amount of resources, such as workers and machines, to produce these goods. If we start by allocating all resources to bread production, we can produce a high quantity of bread but little to no butter.
As we begin to allocate some resources to butter production, we can produce a small amount of butter, but it comes at the cost of reducing the amount of bread produced. Initially, the opportunity cost of producing an additional unit of butter is low because we are reallocating resources from the production of bread that are less efficient—this might be resources that are not very skilled in producing bread but are more suitable for making butter.
However, as we continue to shift resources from bread to butter, we start using resources that are better at making bread, leading to a greater loss in bread production for each additional unit of butter produced, thereby increasing the opportunity cost. This shows that not all resources are equally efficient in producing both goods, which causes the PPF to bend outward.
In summary, the bowed shape of the PPF reflects increasing opportunity costs: as production of one good increases, more and more resources that are not as well-suited for producing that good must be used, leading to larger sacrifices of the other good’s production. This is why the PPF is typically drawn as a curve that bows outward from the origin.