Production Possibilities and
The production possibilities frontier (PPF) is the boundary between those combinations of goods and services that can be produced and those that cannot. To illustrate the PPF, we focus on two goods at a time and hold the quantities produced of all the other goods and services constant. That is, we look at a modeleconomy in which everything remains the same (ceteris paribus) except for the production of the two goods we are considering.
The PPF illustrates scarcity because we cannot attain the points outside the frontier. They are points that describe wants that can’t be satisfied. We can produce at all the points inside the PPF and on the PPF. They are attainable points.
Production EfficiencyWe achieve production efficiency if we cannot pro- duce more of one good without producing less of some other good. When production is efficient, we are at a point on the PPF. If we are at a point inside the PPF, such as point Z, production is inefficient because we have some unused resources or we have some misallocated resources or both.
Resources are misallocated when they are assigned totasks for which they are not the best match.
Trade-off Along the PPF
Every choice along the PPF involves a trade-off – we must give up something to get something else
All trade-offs involve a cost – an opportunity cost.
The opportunity cost of an action is the highest-valued alternative forgone. The PPF helps us to make the concept of opportunity costprecise and enables us to calculate it. Along the PPF, there are only two goods, so there is only one alternative forgone: some quantity of the other good.
The opportunity cost of producing an additional pizza is the number of CDs we must forgo.
Opportunity Cost is a Ratio
Opportunity cost is a ratio. It is the decrease in the quantity produced of one good divided by the increase inthe quantity produced of another good as we move along the production possibilities frontier.
Increasing Opportunity Cost
The PPF is bowed outward because resources are not all equally productive in all activities.
The more of either good we try to produce, the less productive are the additional resources we use to produce that good and the larger is the opportunity cost of a unit of that good.Increasing Opportunity Costs are Everywhere
Just about every activity that you can think of is one with an increasing opportunity cost. There may be some rare situations in which opportunity cost is constant. But in general, when resources are reallocated, they must be assigned to tasks for which they are an increasingly poor match. Increasing opportunity costs are ageneral fact of life.
Using Resources Efficiently
You’ve seen that points inside the PPF waste resources or leave them unused and are inefficient. You’ve also seen that points on the PPF are efficient – we can’t pro-duce more of one good unless we forgo some units of another good. But there are many such points on the PPF. Each point on the PPF achieves production efficiency.The PPF and Marginal Cost
The limits to production, which are summarized by the PPF, determine the marginal cost of each good or ser- vice. Marginal cost is the opportunity cost of producing one more unit. We can calculate marginal cost in a way that is similar to the way we calculate opportunity cost. Marginal cost is the opportunity cost of one additional pizza – the quantity of CDs that mustbe given up to get one more pizza – as we move along the PPF.
Preferences and Marginal Benefit
Preferences are a description of a person’s likes and dislikes.To describe preferences, economists use the concept of marginal benefit. The marginal benefit of a good or service is the benefit received from consuming one more unit of it.We measure the marginal benefit of a good or service by the...