Chapter 1: Problem 30

What is the "production-possibility frontier"? What can be concluded about an economy which is (1) operating on its production-possibility frontier, and (2) operating inside its production-possibility frontier?

Short Answer

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The production-possibility frontier (PPF) is a graphical representation of the maximum output combinations of two goods or services an economy can produce by efficiently utilizing its available resources. If an economy is operating on its PPF, it is efficiently using all of its resources and producing the maximum output combination possible. In contrast, if an economy operates inside its PPF, it indicates underutilization and inefficient allocation of resources. Moving toward the PPF can lead to improvements in efficiency and overall economic growth.

Step by step solution

Definition of Production-Possibility Frontier (PPF)

The production-possibility frontier (PPF) is a graphical representation of the maximum output combinations of two goods or services an economy can produce by efficiently utilizing its available resources. It's an economic concept that demonstrates the trade-offs between these goods, given the resource constraints. The shape of the PPF is typically concave, indicating increasing opportunity costs as more resources are allocated to the production of a particular good.

Implications for an Economy Operating on its PPF

If an economy is operating on its production-possibility frontier, it is efficiently using all of its available resources. In other words, the economy is producing the maximum output combination of goods/services that can be achieved with the current resources and technology. It implies that any increase in the production of one good requires a decrease in the production of the other good, as resources have to be reallocated. In this scenario, the economy is at its highest level of productive efficiency, and opportunity costs exist for any changes in production.

Implications for an Economy Operating Inside its PPF

If an economy is operating inside its production-possibility frontier, it indicates that resources are being underutilized, and the economy isn't performing at its maximum potential. There is also an inefficient allocation of resources, which could be a result of unemployment, underemployment, lack of infrastructure, lack of technological progress, or the inefficient use of resources. In this case, the economy can, in theory, increase production of one or both goods without any trade-offs (at least initially) by better utilizing its available resources. Moving toward the PPF can lead to improvements in efficiency and overall economic growth.

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What is the "production-possibility frontier"? What can be concluded about an economy which is (1) operating on its production-possibility frontier, and (2) operating inside its production-possibility frontier?

Short Answer

Step by step solution

Definition of Production-Possibility Frontier (PPF)

Implications for an Economy Operating on its PPF

Implications for an Economy Operating Inside its PPF

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