1.1.4 production possibility frontiers Flashcards
Moving between two efficient points
Starting at point Y on the PPF we can see that it is possible to produce more red things (R to R1) by shifting resources away from the production of blue things (B to B1) to arrive at point X. We can say that the opportunity cost of the extra red things is the reduced ability to produce and consume blue things i.e. R1-R red things come at a cost of the sacrificed B-B1 blue things. In this example opportunity cost is shown as a movement along the PPF. When more of one output can only be achieved by having less of another output we describe this as a “trade-off”.
At any particular point on a PPF
An economy is producing at point X on its PPF with all resources efficiently employed. It can simultaneously produce OB gallons of beer and OC tonnes of chocolate. The opportunity cost of each of these output levels is the difference between the maximum output of the other good and the actual output of the other good.
Why are PPFs usually concave?
As you move along a PPF you are giving up some of the output of one good to get more of the output of another. You are effectively swapping the production of one good for another. This swap rate is shown by the gradient of the PPF and is a way of measuring the opportunity cost of the production decision.
What if a ppf was linear
If the PPF was linear (a straight line), this would imply that resources could be transferred between different activities without changing the efficiency of their actions i.e. that all resources are as efficient and equally suited regardless of the task they are doing. In the diagram below when resources are reallocated between farming and car manufacture the economy can always replace two units of farm output and use the resources to make 1 car.
Productive efficiency
”all of its scarce resources are fully employed so that it is not possible to make more of any one good/service without having to produce less of another”.
Allocative efficiency
It is not enough to claim that an economy is working efficiently simply because it is making as much output as possible. What if the citizens of the economy do not wish to consume this combination of output? For allocative efficiency to be achieved it is necessary for resources to be used in a way that maximises consumer satisfaction. In this sense there are many productively efficient output combinations but only one that is allocatively efficient.
what is pareto efficiency
If an economy manages to achieve both productive and allocative efficiency simultaneously it is described as Pareto efficient (after the Italian economist Vilfredo Pareto). This requires the economy not only to get onto its PPF but also to get to the ”right” point on the PPF.
Productive efficiency + allocative efficiency = Pareto efficiency
