The Production Possibilities Frontier is the graph showing the relationship between production rates of two goods that could be produced by an entity. The curve is drawn along the efficient production possibilities. Any point inside the curve indicates less than full utilization of production factors while any point outside represents a case that cannot be achieved with the existing level of production resources.

Consider this example. At points A & B we represent two possible situations of producing a combination of cigars and scotch. Point D represents a production combination that cannot be achieved with current resources and C shows under utilization of resources resulting in producing less than could be achieved.

The primary purpose of such a curve is to show how choosing to produce more of one of the products forces a tradeoff of producing less of the other. Another way to look at it is that to increase one product ‘costs’ the amount of the other product that can no longer be produced. This cost is referred to as opportunity cost.