Question

Why are allocations on the production possibility frontier technically efficient? What is the technically inefficient about allocations inside the frontier? Do inefficient allocations necessarily involve any unemployment of factors of production?

Answer 1

The production possibility frontier (PPF) is a graph that depicts all maximum output possibilities for two goods that can be produced by an economy, given a set of inputs consisting of limited available resources. The goods and resources that can be produced by an economy plotted on the production possibilities curve are considered as technically efficient, while the goods and resources that are lying beneath the curve signifies inefficiency. The reason is because when only a few units of the products are produced, then the most suitable factors of production will be utilized thus lowering the cost of producing the good. Unemployment on a production possibilities frontier would be a point inside the PPF. Full employment on production possibilities frontier would be a point on the PPF. Thus, inefficient allocations necessarily involve any unemployment of factors of production.