Description
This video explains how to build and analyse the production possibility frontier. We start by explaining the very basics about the production possibility frontier. Then, we show the relation between the marginal rate of transformation and the production possibility frontier. Finally, we explain how to use the Edgeworth box to derive the production possibility frontier.
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The production possibility frontier represents the quantity of output that can be obtained for a certain quantity of inputs using a given technology. Depending on the technology, the production possibility frontier will have different shapes.
The production possibility frontier can be derived from the contract curve on an Edgeworth box. The isoquants determine how much a certain input has to increase in order to compensate the decrease in the other input, maintaining the quantity of output produced unaltered. The slope of these curves is given by the marginal rate of technical substitution of each output.
The points where the isoquants of different outputs combination intersect, which are Pareto-optimal, allow us to draw the contract curve, from which the production possibility frontier can be derived. Since the technology is given, only one production possibility frontier can be derived from the contract curve (as opposed to the case of the utility possibility frontier).
Learn more by reading the dictionary entry.
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