![]() Most real-world economies and firms are operating well inside the curve (i.e., inefficiently). So can F B of food and C B of computers (point B).Īll points to the right of (or above) the curve are technically impossible (or cannot be sustained for long). Point A in the diagram for example, shows that F A of food and C A of computers can be produced when production is run efficiently. All resources are used as completely as possible (without the situation becoming unsustainable) and appropriately.Īn economy may have productive efficiency, but not allocative efficiency: the market and other institutions of social decision-making (such as government, tradition, and community democracy) may lead to the wrong combination of goods being produced (and the wrong mix of resources allocated) compared to what individuals would prefer. That is, there must be a sacrifice - an opportunity cost - for increasing the production of any good. All points on a production possibilities curve are points of maximum productive efficiency or minimum productive inefficiency: resources are allocated such that it is impossible to increase the output of one commodity without reducing the output of the other. ![]() The concept is used in macroeconomics to show the production possibilities available to a nation or economy (corresponding roughly to macroeconomic notions of potential output), and also in microeconomics to show the options open to an individual firm. It shows the maximum obtainable amount of one commodity for any given amount of another commodity, given the availability of factors of production and the society's technology and management skills. The rules can be changed by changing the rewards however, which can lead to a Nash equilibrium. There is an equilibrium between these two. A choice is non-improvable if the direct reward is higher than the opportunity cost. ![]() sales) of the produced good and the opportunity cost of that good. An additional trade-off exists between the reward ( i.e. It indicates the opportunity cost of increasing one item's production in terms of the units of the other forgone. In economics, the production possibility frontier (the PPF, also called the production possibilities curve (PPC) or the “transformation curve”) is a graph that depicts the trade-off between any two items produced.
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