What does the Production Possibility Frontier illustrate?

• A. A curve showing all maximum combinations of two goods an economy can produce using its current resources and technology efficiently.
• B. A curve showing the relationship between price and quantity demanded.
• C. The production function for one good.
• D. A graph of average total cost.

Answer: (A)

Think of the Production Possibility Frontier as a boundary that shows the maximum combinations of two goods an economy can produce with its current resources and technology. Points on the curve represent efficient use of resources, where producing more of one good requires sacrificing some of the other. The slope there reflects the opportunity cost of shifting resources from one good to the other. Points inside the curve are feasible but inefficient, since not all resources are being used, while points outside are unattainable with current resources. The curve is usually bowed outward because resources aren’t equally good at making both goods, so the opportunity cost rises as you move along.