Economics: Production Possibility Frontier

Now that we have learned about the definition of economics, and about the differences between macroeconomics and microeconomics, we can now talk about the Production Possibility Frontier. It sounds complicated, but we will break it down in a bit. First, let us show how it is related to economics.

To review, economics is the efficient allocation of scarce resources. Remember, because these resources are scarce, or limited, whoever practices economics cannot simply do whatever he wants, or buy everything he wants. Instead, he should choose where he wants the resources to go—in other words, allocate them to different things.

Following our Law of Opportunity Cost, whenever he spends for one thing, he gives up spending for another thing. This means that the allocation of scarce resources should be as efficient as possible, so that the person or nation can get the most from their resources.

Now, let us go to the definition of production possibility frontier. Let us start with the last word, “frontier.” Who has not heard that classic “Space: the final frontier” from any Star Trek movie or series episode? Frontier literally means “boundary,” but it can also mean “wilderness,” as in a place that has not been reached yet. So this frontier is a boundary that talks about the limit of the potential of economic production. Still confusing? Let us go to the first two words.

“Production possibility” means what a person would get when they allocated their resources. So if a student goes to the store and buys 2 ice cream bars and a cookie pack, what he buys is one production possibility. If he buys 2 chocolate bars and an ice cream cone, that is another production possibility.

However, the student only reaches the production possibility frontier when he has no more money after buying. Every time he spends all of his money on what he wants to buy, what he buys is on the production possibility frontier.

Why is this important to economics? Scarce or limited resources will not be allocated efficiently unless all of them are used for a production possibility. If there are resources left over, proper economics is not being practiced. Every time resources are used, they should be on the production possibility frontier to be allocated efficiently.

Let us connect the production possibility frontier to the Law of Opportunity Cost again. Because resources are scarce, and all of them have to be used, the student can only buy a combination of what he wants in the store.

If we assume that every time he buys, he spends all his money, then the Law of Opportunity Cost still applies. If a student buys 3 ice cream bars and 4 chocolate bars at the frontier, he will need to change the combination to stay on the frontier. He can buy 2 ice cream bars and 5 chocolate bars, or even 7 straight chocolate bars.

The importance of the production possibility frontier is that in economics, the idea is to always be at the production possibility frontier. That way, whoever is practicing economics gets the most satisfaction and use from his resources.

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