Question

Explain and illustrate the concepts of scarcity, production efficiency, and tradeoff using the production possibilities frontier.​

Answer 1

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• A production possibilities frontier, or PPF, defines the set of possible combinations of goods and services a society can produce given the resources available. Choices outside the PPF are unattainable (at least in any sustainable way), and choices inside the PPF are inefficient. Sometimes the PPF is called a production possibilities curve.
• The law of diminishing returns holds that as additional resources are devoted to producing a good, the marginal increase in output will become smaller and smaller.
• All choices along a PPF display productive efficiency—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 PPF that reflects the mix of goods society most desires is the choice with allocative efficiency. We need more information than just the PPF to determine allocative efficiency.
• When a country's opportunity cost for a specific good is lower than another country's, we say that the country has comparative advantage for that good.

The Production Possibilities Curve (PPC) is a model used to show the tradeoffs associated with allocating resources between the production of two goods. The PPC can be used to illustrate the concepts of scarcity, opportunity cost, efficiency, inefficiency, economic growth, and contractions.

For example, suppose Carmen splits her time as a carpenter between making tables and building bookshelves. The PPC would show the maximum amount of either tables or bookshelves she could build given her current resources. The shape of the PPC would indicate whether she had increasing or constant opportunity costs.