1.1.4
Production Possibility Frontier (PPF)
A PPF shows the maximum potential output combinations of two goods or services that an economy can achieve when all its resources are fully and efficiently employed.
The PPF and economic efficiency
Making best or optimum use of our scarce resources among competing ends so that economic and social welfare is maximised over time
Any point ON the PPF
An efficient allocation of scarce resources
Any point INSIDE the PPF
Inefficient allocation of resources as there are unemployed resources
Any point OUTSIDE the PPF
This is not yet attainable. This would need an increase in factor resources, an increase in productivity or improvement in technology to reach this combo
Law of diminishing marginal returns
It occurs because not all factor inputs are equally suited to producing items leading to low productivity
Pareto efficiency
This outcome is an action that harms no one and helps atleast one person. We are pareto efficient if the only way to make one person better off is to make another person worse off
Where does Pareto efficiency occur?
On points that lie on a PPF. When an economy is operating on a production possibility frontier, then it is not possible to increase output of goods without reducing output of services.