How to Plot a Production Possiblitiy Frontier
The Production Possibility Frontier, or PPF, is an economic concept that portrays opportunity cost, or the sacrifice made when choosing one option over another. When a business manager chooses to manufacture one product over another, he uses the PPF curve to determine the most profitable option. The opportunity cost is the profit that would have been made had he chosen the second most profitable option. To portray the PPF, we draw a graph plotting the capacity of each option at different combinations of production.
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Instructions
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Gather your data. For the example below, assume that a dairy processor produces only cheese and milk. She can produce all cheese, all milk or a combination of both:
If she chooses to produce all milk and no cheese, she could produce 12,000 gallons of milk.
If she chooses to produce 10,000 gallons of milk, she could also produce 3,000 pounds of cheese.
If she chooses to produce 7,000 gallons of milk, she could also produce 5,000 pounds of cheese.
If she chooses to produce 4,000 gallons of milk, she could also produce 7,000 pounds of cheese.
If she chooses to produce 3,000 gallons of milk, she could also produce 8,000 pounds of cheese.
If she chooses to produce no milk, she could produce 11,000 pounds of cheese.
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Draw the PPF curve by drawing a vertical line for the Y-axis and a horizontal line for the X-axis. The two lines should intersect at the bottom left-hand corner.
Label the X-axis "Gallons of Milk (in thousands)" and the Y-axis "Pounds of Cheese (in thousands)."
Draw tick marks in increments of 5 along both axes, starting with 0 at the corner (then 2, 4, 6 and so on) and ending with 16.
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Plot your data on the graph.
Draw a small dot on the X-axis at the 12. This represents the first data point where 12,000 gallons of milk are produced, but no cheese.
Draw a small dot on the Y-axis between the 10 and the 12 tick marks. This represents the last data point were 11,000 pounds of cheese are produced, but no milk.
Draw the second data point where 10,000 gallons of milk and 3,000 pounds of cheese are produced. Set a ruler perpendicular to the X-axis at the tick marked labeled 10. Lightly draw a vertical line. Place the ruler perpendicular to the Y-axis between the 2 and 4 tick marks. Draw a light horizontal line. Put a small dot where these two lines intersect.
Repeat for each data point above.
Connect the dots. You will notice that the PPF curves outward slightly, indicating that a combination of the two products manufactured would result in the highest production. Any combination inside, or to the left of the PPF, would represent a situation where the company produces less than its capacity. Any production outside, or to the right of the PPF, represents a situation that exceeds capacity.
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References
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