Production possibility frontiers and economic efficiency.

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production possibility frontiers and economic efficiency

Introduction

The Production Possibilities Frontier (PPF) shows the maximal combinations of two goods that can be produced during a specific time period given fixed resources and technology and making full and efficiency use of available factor resources. A PPF is normally drawn as concave to the origin because the extra output resulting from allocating more resources to one particular good may fall. This is known as the law of diminishing returns and can occur because factor resources are not perfectly mobile between different uses, for example, re-allocating capital and labour resources from one industry to another may require re-training, added to a cost in terms of time and also the financial cost of moving resources to their new use.

An example of a conventional PPF is shown in the diagram above which shows potential output of DVD players and MP3 players from a given stock of labour and capital. Combinations of the two goods that lie within the PPF are feasible but show an output that under-utilises existing resources or where resources are being used inefficiently. Combinations of the two goods that lie on the PPF are feasible and can be