Note that we can approximate the MRT by dividing the change in Good Y by the change in Good X. It tells you how many units of Good Y you need to give up to produce an extra unit of Good X. The MRT measures the opportunity cost of producing one additional unit of Good X. The slope of a PPF curve is known as the marginal rate of transformation (MRT). The Slope of a PPF: Marginal Rate of Transformation (MRT) These types of tradeoffs are mapped and modeled using a production possibilities frontier, and the slope of the PPF can be used to quantify these tradeoffs. If an entrepreneur spends most of her budget producing one good, she must spend less producing another. If the dollars in your bank account are limited, more money spent on groceries means less spending on other necessities, such as clothing. There are only 24 hours in a day, so you will have less time with your family if you spend time working. Since resources are scarce, devoting them towards one thing often comes at the cost of not achieving or acquiring something else. We don’t have an unlimited amount of these things, so decisions need to be made about how to prioritize and allocate them. Time is scarce, money is scarce, and inputs in production are scarce. Scarcity is the simple fact that there are never enough of the things we need or want. PPFs help demonstrate two fundamental concepts in economics: scarcity and tradeoffs. The carpenter doesn’t have sufficient resources to produce 11 tables and 25 chairs. Point F, on the other hand, is not feasible: it lies beyond the PPF. You can quickly check this by comparing her output at Point E to her output at Point B or C! By switching to a point on the PPF, she would increase her production. However, doing so wouldn’t maximize her output, so she would be better off choosing a point that lies directly on the PPF instead. The carpenter can choose a point such as Point E, which is not on the PPF but lies within the feasible set. She can also choose to build any combination of chairs and tables, so long as the combination is on the PPF or within the feasible set.Īny point along the PPF (such as Points B and C) represents a productively efficient combination of goods, a combination that fully utilizes the available resources. If she devotes all of her resources to building chairs, she can build 26 chairs but no tables (Point D). If the carpenter devotes all of her resources to building tables, she can build 10 tables but no chairs. The figure below models the production possibilities for a carpenter who wants to build tables and chairs with a fixed amount of lumber and time. There are not enough resources to produce combinations in the infeasible set. Any combination in the infeasible set is not attainable. The area beyond the PPF is called the infeasible set. If you choose a combination inside the feasible set, there will always be a combination of goods on the PPF that will increase output, and this combination will include more of both or one of the goods. Any combination within the feasible set that doesn’t lie directly on the PPF can be produced, but it isn’t productively efficient to do so. The area within the PPF is called the feasible set. Notice that the points along the PPF include many different combinations of Good X and Y, including those where only one good is produced. By “productively efficient,” we mean that all of the resources are utilized. These combinations are feasible and maximize output. At this point, 0 units of Good Y would be produced.Īny combination of goods that lies along the PPF represents a productively efficient combination of goods. This tells you the maximum amount of Good X that can be produced given the resource constraints. At this point, 0 units of Good X would be produced.Ĭonversely, the PPF intersects the x-axis at a point where all available resources are dedicated to producing Good X. This point represents the maximum amount of Good Y that can be produced given the resource constraints. The point where the PPF intersects the y-axis represents an allocation of resources where all of the available resources are devoted to the production of Good Y. We’ll call these goods: Good X and Good Y. A PPF maps the quantity of one good along the x-axis and the quantity of a second good along the y-axis.
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