Production possibility frontier (PPF) is a primary model of economy’s production possibilities and all possible efficient combinations of outputs for Managers. It is sometimes referred as Production Possibility Curve (PPC).
The primary purpose of PPF is to comprehend the tradeoff that a firm faces in its production decisions. Tradeoff means the production of one commodity can be increased only by decreasing the production for the other, subsequently. Production possibility curve is obtained through plotting the graph between both products. This curve can also measure the efficiency of production.
With the help of PPF, you can decide which combination of products at which production level will be best for your firm, but its graphical representation or calculation is limited in itself as there is a choice between two products, a product, and service or between two services, depending on the type of business.
The economic models represent reality through simple description. The production possibility frontier model is useful in taking effective decisions about allocating the resources a firm or business to various product lines or development areas.
Ceteris paribus (\ˈkā-tər-əs-ˈpa-rə-bəs-Merriam Webster) is a Latin word meaning "with other things the same." In all economic models, we have to assume all other factors constant while analyzing various combinations of situations. In this situation, we have to analyze a combination of products in PPF while assuming all other factors as constant. A couple of definitions shall explain the concept:
“Production possibility frontier is the graph which indicates the various production possibilities of two commodities when resources are fixed. The production of one commodity can only be increased by sacrificing the production of the other commodity. It is also called the production possibility curve or product transformation curve” –The Economic Times
“A curve depicting all maximum output possibilities for two or more goods given a set of inputs (resources, labor, etc.). The PPF assumes that all inputs are used efficiently” –Inverstopedia.com
It is the rate at which a firm can substitute a small quantity of a product production level with another. This rate expresses the opportunity cost of a unit of each product selection for production in terms of another.
An immediate advantage to you, through induction of newer technology or fall in inputs cost, may shift PPC outwards, increasing the opportunities for you to manufacture more products while staying at the same or less cost level.
An inward shift of PPC shows a disadvantage to you through scarcity of resources due to any reason, i.e., increase in the cost of raw material, increased inflation rate or taxation. The inward movement of PPC will confine you to decide for a comparably lower level of production.
Huge numbers of firms offer a mix of both products and services through Product-service system, in contrast to traditional concentration on products. Successful companies now focus on providing their customers with a marketable set of products and services nice enough to jointly satisfy customer’s needs.
Let’s say; you are restaurant owner aimed at providing your customers with tasty food and excellent table service. You can neither put all of your employees into kitchen work nor for table service. Focusing on PSS is a good idea, but how possibly you can use your limited workforce efficiently, to cope customer service issues along not compromising on production/kitchen related work, at the same time?
The answer lies in the thorough analysis of PPF for your firm. Visualize and calculate dynamic tradeoff between dedicating a particular part of your team to production while a considerable fraction of them assigned to customer service. The illustration of various combinations through PPC will enable you to pick out the right combination depending on your business needs or organizational strategy.
Oct 07, 19 02:55 PM
Running of companies without any management rules seems a far-fetched idea. However, recent experiments show that if properly executed, it can end management era.
Oct 07, 19 02:47 PM
Profit maximization is the goal of every financial manager for a company. Go through a few key points for profit maximization.
Jul 30, 19 03:50 PM
The Pythagorean Theorem related the side length of the three sides of a right angled triangle (c^2 = b^2 + a^2). What you describe above is nothing to