Key Concepts and Summary
A production possibilities frontier defines the set of choices society faces for the combinations of goods and services it can produce given the resources available. The shape of the PPF is typically curved outward, rather than straight. Choices outside the PPF are unattainable and choices inside the PPF are wasteful. Over time, a growing economy will tend to shift the PPF outwards.
The law of diminishing returns holds that as increments of additional resources are devoted to producing something, the marginal increase in output will become smaller and smaller. All choices along a production possibilities frontier display productive efficiency; that is, it is impossible to use society’s resources to produce more of one good without decreasing production of the other good. The specific choice along a production possibilities frontier that reflects the mix of goods society prefers is the choice with allocative efficiency. The curvature of the PPF is likely to differ by country, which results in different countries having comparative advantage in different goods. Total production can increase if countries specialize in the goods they have comparative advantage in and trade some of their production for the remaining goods.
when the mix of goods being produced represents the mix that society most desires
when a country can produce a good at a lower cost in terms of other goods; or, when a country has a lower opportunity cost of production
law of diminishing returns
as additional increments of resources are added to producing a good or service, the marginal benefit from those additional increments will decline
production possibilities frontier (PPF)
a diagram that shows the productively efficient combinations of two products that an economy can produce given the resources it has available.
when it is impossible to produce more of one good (or service) without decreasing the quantity produced of another good (or service)
- What is comparative advantage?
- What does a production possibilities frontier illustrate?
- Why is a production possibilities frontier typically drawn as a curve, rather than a straight line?
- Explain why societies cannot make a choice above their production possibilities frontier and should not make a choice below it.
- What are diminishing marginal returns?
- What is productive efficiency? Allocative efficiency?
Critical Thinking Questions
- During the Second World War, Germany’s factories were decimated. It also suffered many human casualties, both soldiers and civilians. How did the war affect Germany’s production possibilities curve?
- It is clear that productive inefficiency is a waste since resources are being used in a way that produces less goods and services than a nation is capable of. Why is allocative inefficiency also wasteful?