Question

Explain how to derive a PPF. For instance, how is the extreme point on the vertical axis identified? How is the extreme point on the horizontal axis identified?

Short answer

To derive a PPF, one must understand the concept of PPF, identify the resources and goods, and then plot the PPF accordingly. The extreme point on the vertical axis is identified when all resources are allocated to the good represented on the vertical axis, leaving none for the other good. Meanwhile, the extreme point on the horizontal axis is identified when all resources are focused on production of the good represented on the horizontal axis, leaving none for the other good.

Step-by-step solution

Understanding the Concept

One must first understand what a PPF is. It is a curve that depicts all maximum output possibilities for two goods, given a set of inputs consisting of resources and other factors.

Identifying the Resources and Goods

Identify the resources available (like labor, capital, etc.) and the two goods to be produced. Assume that these resources are to be fully utilized.

Deriving the PPF

Plot the maximum amount of one good that can be produced for various quantities of the other using the available resources. The curve formed as a result is the PPF.

Identifying the Extreme Points

The extreme point on the vertical axis is identified when all resources are allocated to the production of the good represented by the vertical axis, and no resources are allocated to the production of the good represented by the horizontal axis. On the other hand, the extreme point on the horizontal axis is identified when all resources are allocated to the production of the good represented by the horizontal axis, and no resources are allocated to the production of the good represented by the vertical axis.