The production possibilities frontier (PPF) is the boundary between the combinations of goods
and services that can be produced and those that cannot.
- We focus on two goods at a time and hold the quantities produced of all the other goods
and services constant.
Production efficiency is when we produce goods and services at the lowest possible cost. In the
PPF graph, production is efficient when the outcome occurs at all the points on the PPF. If the
points are inside the PPF, then the production is inefficient because we are giving up more than
necessary of one good to produce a given quantity of the other good.
- Production is inefficient inside the PPF because resources are either unused or
misallocated or both.
Tradeoffs are things that arise in every imaginable real world situation in which a choice must be
- Every choice along the PPF involves a tradeoff.
- In real world PPF, we can produce more of any one good or service only if we produce
less of some other goods or services.
- All tradeoffs involve a cost (Opportunity cost).
Opportunity is the decrease in the quantity produced of one good divided by the increase in the
quantity produced of another good as it moves along the production possibilities frontier.
- Opportunity Cost of an choice/action is the highest valued alternative forgone.
- Along the PPF, there are only two goods, so there is only one alternative forgone: some
quantity of the other good.
- The outward bowed shape of the PPF reflects increasing opportunity cost.
- The PPF is bowed outward because of resources not being all equally productive in all
- When the rate of production increases, so does the opportunity cost of production.
Allocative efficiency is when goods and services are produced at the lowest possible cost and in
the quantities that provide the greatest possible benefit.
Marginal Cost of a good is the opportunity cost of producing one more unit of it. It can be
calculated from the slope of the PPF.
Marginal benefit is the benefit received from consuming one more unit of a good or service.
Preferences are people’s likes and dislikes and the intensity of those feelings.
Marginal benefit curve is a curve that shows the relationship between the marginal benefit from a
good and the quantity consumed of that good. - It is measured from a good or service by the most that people are willing to pay for an