The Production Possibility Curve (frontier) is designed to help demonstrate prod

Question

The Production Possibility Curve (frontier) is designed to help demonstrate production and allocative efficiency. It also demonstrates that we have to make decisions on how to use the resources as efficiently as possible to satisfy as many needs and wants as we possibly can. Does it? Partially. It depicts (pictures) the limits of output (allocative efficiency) with two inputs. Everything that falls on the frontier is efficient and attainable. That's correct as far as it goes. However, there are thousands, if not millions, of sales and purchase decisions made daily so it would be impossible to depict all those transactions on a single curve. The curve therefore is an abstract---idealized representation of allocation and production efficiency.

For the sake of peace in economics heaven I will concede that it also depicts production efficiency. As a former production operations manager I say with a high degree of certainty that it doesn't. Production efficiency requires more explanation which I will supply in class.

What the curve does, and does well, is demonstrate that we must make decisions on how to use our scarce resources so that we can satisfy as many needs and wants as possible with our limited resources at hand. The frontier simply demonstrates that we must make rational decisions on how to use our individual resources so that we may improve our current condition. Why would anyone make a decision that makes them worse off?

The curve (frontier) is also an efficient way to demonstrate the Law of Increasing Marginal Costs as well as the Law of increasing Opportunity Costs. We will cover this in more detail in class.

There are 2 embedded questions.

Give me an example of increasing opportunity cost.

Explanation / Answer

A production possibility Frontier has a slope which increases in value and that makes the production possibility Frontier concave in shape. The opportunity cost of producing one more unit of a good that is measured on the horizontal Axis goes on increasing as we reduce the quantity of the good that is measured on the vertical axis. Because the model of production possibilities assumes only two goods initially it does not represent the entire economy but gives us an idea of how the location between two goods can be made efficient. The opportunity cost continues to increase because as a resource become scares, it becomes expensive.

Suppose that a nation has 100 units of labour. The nation can produce two goods, machines and food. Labour is assumed to be skilled enough to produce both goods with same efficiency. If the nation is producing a combination of Machines and food, and it attempts to increase the production of food it has to move its labour units from the production of Machines to the production of food. This movement of labour is costly and as more and more labour is taken out from one sector and is employed in another, the opportunity cost continue to rise. Because the opportunity cost is continuously increasing along the PPF, the marginal cost which includes this opportunity cost, also exhibits increasing value.

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