The production possibility frontier (SACE Stage 2 Economics)
“Construct and interpret a production possibility frontier to illustrate scarcity, choice, opportunity cost, efficiency and growth.”
The production possibility frontier (PPF) shows the maximum combinations of two goods an economy can produce with its resources fully and efficiently employed. Points on the curve are efficient, points inside are inefficient, points outside are unattainable, and the curve's slope shows opportunity cost.
Jump to a section
What this dot point is asking
You must be able to draw a PPF, read points on, inside and outside it, explain its shape, and use it to illustrate opportunity cost, efficiency and economic growth.
What the PPF shows
The PPF is drawn for an economy producing just two goods, for example consumer goods and capital goods. The two axes measure the quantity of each good. The curve maps the maximum output of one good for every level of output of the other, assuming resources and technology are fixed and fully used.
Picture a curve falling from a high point on the vertical axis to a high point on the horizontal axis, bowing outward away from the origin.
A point on the curve is productively efficient (all resources used fully and well). A point inside the curve means resources are unemployed or used inefficiently. A point outside the curve is currently unattainable with existing resources and technology.
Scarcity, choice and opportunity cost on the PPF
- Scarcity is shown by the unattainable region beyond the frontier - the economy simply cannot reach it now.
- Choice is shown by selecting any point on the curve, deciding the mix of the two goods.
- Opportunity cost is shown by the downward slope. To produce more of one good, the economy must move along the curve and give up some of the other.
Why the PPF bows outward
The curve is concave to the origin (bowed out) because of the law of increasing opportunity cost. Resources are not equally suited to producing both goods. As the economy shifts more resources toward one good, it must use resources that are progressively less suited to it, so each extra unit costs more of the other good than the last.
Increasing opportunity cost
Suppose an economy produces wheat and steel.
- Moving from $0$ to $10$ units of steel, it sacrifices $5$ units of wheat.
- Moving from $10$ to $20$ units of steel, it sacrifices $15$ units of wheat.
The opportunity cost of steel rises as more is produced, because the resources best suited to wheat (fertile land, farm labour) are the last to be transferred to steel. This rising sacrifice is exactly what makes the PPF bow outward rather than form a straight line.
If opportunity cost were instead constant, the PPF would be a straight downward-sloping line.
Efficiency and unemployment
A point inside the frontier signals that the economy is not using all its resources, or is using them poorly. This typically reflects unemployment of labour or idle capital. Moving from an interior point out to the frontier raises output of both goods at no opportunity cost, because previously idle resources are put to work.
In a recession, the economy operates well inside its PPF as workers and factories lie idle. Recovery moves it back toward the frontier without any trade-off, which is why it can raise output of everything at once.
Economic growth: shifting the frontier
The frontier itself shifts outward when productive capacity increases. Causes include:
- More resources (population growth, new land or capital, immigration).
- Better technology or productivity.
- Improved skills and education of the workforce.
An outward shift represents economic growth: combinations once unattainable become possible. A shift inward (war, natural disaster, capital destruction) represents a fall in capacity.
Producing more capital goods today (rather than consumer goods) shifts the future PPF outward by more, because capital expands future productive capacity. This is the growth-versus-consumption trade-off.
Reading SACE diagram questions
SACE Stage 2 Economics frequently asks you to draw on or complete a PPF diagram for one or two marks, so the difference between a movement and a shift decides the mark. A typical instruction is to "illustrate" the effect of an event. Work through three checks before you draw:
- Capacity or mix? If the event changes the economy's total resources or technology (new capital, immigration, a productivity-raising innovation, a natural disaster), shift the whole frontier. If it only changes which goods are made with the same resources, move the production point along the existing curve.
- Which axis moves more? When growth is uneven (efficiency gains concentrated in one good), pivot or stretch the frontier further along that good's axis rather than drawing a parallel shift.
- On, inside or outside? Place the realised production point on the curve for full efficiency, inside for unemployment or under-use, and never outside the current frontier unless the curve itself has shifted out.
SACE markers reward fully labelled diagrams. Name both axes (the two goods), label the original and new curves clearly (PPF and PPF1), and mark the production points. An unlabelled but correct shape often loses the labelling mark.
A common application links the PPF to the opportunity cost of choices governments make, such as spending on capital infrastructure versus immediate consumption, or on defence versus civilian goods. Connecting the diagram to a real trade-off in your answer lifts a description into the analysis the rubric asks for.
Do not confuse a movement along the PPF with a shift of the whole curve. Moving along the curve is a change in the mix of two goods with fixed capacity (an opportunity-cost trade-off). Shifting the curve is a change in the economy's total capacity (economic growth or decline). Reallocating resources never shifts the frontier; it only moves you along it.
Exam-style questions
Questions in the style of SACE Board exam questions on this dot point, each with a worked answer. They are written by ExamExplained unless tagged "Past paper"; the year shows the paper a question is modelled on.
2020 SACE Stage 2-style2 marksA diagram shows the meat production possibilities for, and realised production of, beef and chicken in 1960. On this diagram, illustrate the meat production possibilities for beef and chicken in 2020. (Since 1960 chicken production has had significantly larger gains in efficiency than beef.)Show worked answer →
This is a 2-mark diagram task. Describe what to draw and why it earns the marks.
Shift the frontier outward, but unevenly (1 mark). Draw a new PPF that lies outside the 1960 curve, reflecting economic growth from greater productive capacity. Because efficiency gains have been much larger in chicken than beef, the curve should pivot or extend further along the chicken axis than the beef axis, so the maximum chicken output rises by more.
Show the realised point moving (1 mark). Place the 2020 production point on or near the new frontier, located so that more chicken (and relatively less or similar beef) is produced, consistent with chicken becoming the most purchased meat.
Markers look for an outward shift biased towards chicken, not a uniform parallel shift, plus a sensible production point.
2019 SACE Stage 2-style1 markA report identified long-term benefits of driverless vehicles for Country A, including a 2% increase in GDP and new employment opportunities. Indicate on the production possibility diagram (consumer goods on one axis, capital goods on the other) the possible long-term impact of the use of driverless vehicles on the economy of Country A.Show worked answer →
One mark for the correct shift.
Draw the entire production possibility frontier shifting outward (to the right, away from the origin). The driverless-vehicle technology raises productivity and adds capital and labour resources, so the economy can now produce more of both consumer goods and capital goods. This outward shift represents long-run economic growth, which is exactly what a 2% rise in GDP and new technology-related employment imply.
Do not just move a production point along the existing curve, that would show only a change in the mix of output, not growth. The full curve must shift out.
Practise this
Sources & how we know this
- Stage 2 Economics subject outline (2025 onwards) — SACE Board
- Stage 2 Economics: external assessment — SACE Board