Production Possibilities Frontier and Efficiency

Key Concepts

• Productive Efficiency: Achieved when a point is on the production possibilities frontier.
  • Moving along this curve involves trade-offs (e.g., more rabbits means fewer berries).
  • Points inside the curve are inefficient as you can gain more of one good without losing another.
• Allocative Efficiency: Achieving the best allocation based on preferences.
  • More subjective and based on the marginal benefits and costs of each scenario.

Marginal Cost (MC) of Incremental Rabbit (in Berries)

• Scenario F:
  • 0 rabbits: MC = 20 berries
• Scenario E:
  • 1 rabbit: MC = 40 berries
• Scenario D:
  • 2 rabbits: MC = 60 berries
• Scenario C:
  • 3 rabbits: MC = 80 berries
• Scenario B:
  • 4 rabbits: MC = 100 berries

Graphing Marginal Cost

• X-Axis: Number of rabbits (0 to 5)
• Y-Axis: Marginal cost in berries (20 to 100)
• Plotted scenarios create a linear curve of marginal costs.

Marginal Benefit (MB) of Incremental Rabbit (in Berries)

• Marginal benefit is decided by how much a person would pay in berries for one more rabbit.
• Scenario F:
  • No rabbits (300 berries): MB = 100 berries
• Scenario E:
  • 1 rabbit: MB = 80 berries
• Scenario D:
  • 2 rabbits: MB = 60 berries
• Scenario C:
  • 3 rabbits: MB = 40 berries
• Scenario B:
  • 4 rabbits: MB = 20 berries

Graphing Marginal Benefit

• X-Axis: Number of rabbits (0 to 5)
• Y-Axis: Marginal benefit in berries (20 to 100)
• Plotted scenarios create a linear curve of marginal benefits.

Decision-Making: Allocative Efficiency

• Compare marginal benefit (MB) with marginal cost (MC).
• At points where MB > MC, increase the number of rabbits.
• At points where MB < MC, decrease the number of rabbits.
• At the optimum scenario (D):
  • Marginal cost = Marginal benefit at 60 berries
  • Allocative efficiency is achieved.

Summary

• Productive efficiency deals with being on the frontier (trade-offs needed).
• Allocative efficiency is achieved where marginal cost equals marginal benefit.
• Graphs of MC and MB help visually determine the optimal point (Scenario D).