PPFs and efficiency

Production possibilities frontiers (PPFs) can be used to illustrate the idea of productive efficiency.

Productive efficiency relates to how scarce resources are used to create goods and services.

There are two ways to analyse productive efficiency - firstly, if the economy is productively efficient then all units of goods and services are being produced at their lowest average cost.

Secondly, we could consider how many units of output are being created from a given quantity of an input. For example, we could assess productive efficiency by considering labour productivity - namely, output per worker.

Efficiency and preferences

While all points on a PPF are equally efficient, given that the combinations represent the maximim production possible by using all an economy's scarce resources. they are not all equally desirable.

For example, point ‘b’ may be preferred to point ‘c’ as it contains more consumer goods, leading to a higher current standard of living.

PPFs and efficiency

However, it could be argued that point ‘c’ may be preferable in that, with more capital goods produced in the short run, the economy can grow and eventually produce more consumer goods in the long run, at point ‘x’. The PPF shifts outwards as a result of increased capital spending.

Video on PPFs and efficiency

Pareto efficiency

Pareto efficiency can be understood through PPFs. A point on a PPF is referred to as 'Pareto efficient' given that, when on the boundary, the only way to increase the output of one good is to decrease the output of the other good. If this condition is not met, then an economy is operating below Pareto efficiency and can, therefore, increase output without reducing output elsewhere in the economy.

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