Using a PPF to show choice, opportunity cost, efficiency and growth

Overview

How a production possibility frontier illustrates the concept of choice, opportunity cost be read directly from a production possibility frontier and productive efficiency mean.

What you need to know

Answer each one before you reveal it.

Questions from this subtopic

Each one with the model answer underneath.

1. 1

   Explain how a production possibility frontier illustrates the concept of choice.

   Model answer

   Because every point on the frontier is attainable but only one can be produced at a time, the frontier presents society with a menu of feasible combinations from which it must pick. Choosing a point further along the horizontal axis means accepting a point lower on the vertical axis. The curve therefore makes the necessity of choosing visible: the economy can have any combination on the curve, but not more than one.

2. 2

   How can opportunity cost be read directly from a production possibility frontier?

   Model answer

   Opportunity cost is read from the slope: moving between two points on the curve, the amount of the good on the vertical axis given up divided by the amount of the good on the horizontal axis gained is the opportunity cost of one extra unit of the horizontal good. On a bowed-out curve the slope steepens as you move right, showing that opportunity cost rises as more of that good is produced.

3. 3

   An economy's frontier shows these combinations of capital goods and consumer goods: (0, 50), (1, 48), (2, 44), (3, 38) and (4, 30). Calculate the opportunity cost of each successive capital good and state what the pattern shows.

   Model answer

   Moving from 0 to 1 capital good costs 50 − 48 = 2 consumer goods. From 1 to 2 costs 48 − 44 = 4. From 2 to 3 costs 44 − 38 = 6. From 3 to 4 costs 38 − 30 = 8. The opportunity cost rises from 2 to 8 consumer goods as capital-goods output increases, which is increasing opportunity cost and is why the frontier is drawn bowed outwards.

4. 4

   Using the combinations (0, 50), (1, 48), (2, 44), (3, 38) and (4, 30), calculate the opportunity cost of moving from 1 capital good to 3 capital goods.

   Model answer

   At 1 capital good the economy produces 48 consumer goods; at 3 capital goods it produces 38. The sacrifice is 48 − 38 = 10 consumer goods for 2 extra capital goods, an average opportunity cost of 5 consumer goods per capital good. This is higher than the cost of the first capital good and lower than the cost of the fourth, as increasing opportunity cost implies.

5. 5

   What does productive efficiency mean, and how is it shown on a production possibility frontier?

   Model answer

   Productive efficiency means producing at the lowest possible cost per unit, so that no more output of one good could be obtained without reducing output of another. It is shown by any point lying on the frontier itself, because at such a point every resource is employed and used in its most productive combination. Points inside the curve are productively inefficient.

6. 6

   Explain why every point on a production possibility frontier is productively efficient but only one is likely to be allocatively efficient.

   Model answer

   Productive efficiency only requires that resources are not wasted, which is true everywhere on the curve. Allocative efficiency additionally requires that the particular combination produced matches what society most wants, so that no reallocation could make people better off. Since society's preferences point to one particular mix of goods, most points on the frontier produce the wrong combination efficiently, and only the point matching those preferences achieves both.

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