Production efficiency refers to the production of goods at the lowest possible cost. On the other hand, production inefficiency refers to the production of goods at a higher cost than the existing costs known. Economists view an economy as productive efficient if it can use its minimum or limited resources in the production of the maximum amount of outputs for the given economy. An economy that is production inefficient is one that does not use its given resources to produce the maximum number of units. Graphs as very essential for economists in illustrating such concepts. An example of the most commonly used graphs is the production possibility frontier. This graph is regarded as one of the most basic graphs used by economists. It demonstrates how choices related to the economy are made. It also gives an illustration of the important concept of scarcity of resources, opportunity cost, production efficiency, and choice. To do so the PPF uses a simplified two-good model. The production possibility frontier is applied to depict combinations of services and goods that can be produced by an economy if the economy applies all the available resources. It is through the production possibility frontier that balance is struck between the levels of production and the amount of resources available in an economy. An economy that operates along the production possibility frontier is considered to be operating at full employment (Manning, & McMillan, 1999).
In using the two-good model, several assumptions are made. Firstly, there is an assumption that the country or the economy under study is only producing two goods. This assumption is essential in that it simplifies the analysis and enables economists to perform analysis by use of a simple graph. There is also an assumption that the resources that are found in the economy are limited and fixed. The reason for this assumption is that if an economy had unlimited resources, the economy can go ahead and produce the amount of goods that it desires. This will in effect eliminate the important concept of opportunity cost which is essential in production possibility frontier. There is also a third assumption that as more units of a given good are produced, the opportunity cost that exists between the two goods will always remain constant. In case the opportunity cost that exists between the two goods remain constant, we will have a scenario whereby the resulting production possibility frontier becomes a straight line. There are other cases whereby the production's opportunity cost of the goods does not remain constant. In such cases, the resulting production possibility frontier is not a straight line but rather appears concave in shape. This concave shape shows the increasing opportunity costs (Schmidt, & Sickles, 1984). This kind of production possibility frontier is the most common in economics. It is explained by a law called the law of increasing opportunity costs. According to the law, the economy's technical capability is always different. The economy, therefore, is always technically gifted towards the production of a single good than other goods (Bauer, 1990).
The production possibility frontier depicts all the output combinations available for this island nation when all the factors of production are utilized to their full potential. This economy could decide to operate at a position inside the curve which will mean operating at a capacity that is less than its potential. If it chooses to operate here, the combination of the goods will be in such a way that it is less than what the nation's economy can produce at its full potential. At points outside the production possibility frontier curve, it will be impossible for the economy to produce here. This is because producing here will mean that the output levels exceeds the economy's capacity which it cannot happen (Schmidt, 1985).
The shape of the above production possibility frontier shows the important principle of increasing cost. It is evident from the graph that as one product is being produced more, the amounts of the other product are increasingly given up. From this particular example, there are some factors of production that are suited best to produce grain and wine. However, increasing production of one of these goods will mean that the resources that are suitable for producing the other good need to be diverted to produce the other good. It is not necessarily true that wine producers who are experienced can efficiently produce grain. On the other hand, grain producers who produce grain at best cannot necessarily efficiently produce wine. The opportunity cost, therefore, increases as we move towards the two extremes of the production possibility frontier curve (Manning, & McMillan, 1999).
In conclusion, production possibility frontier is an essential tool that helps us understand the basic economic concepts (Powell, & Gruen, 1968). It helps economists to acknowledge and appreciate basic and essential economic concepts such as scarcity of resources, choice, and opportunity costs. It helps economists as well understand the application of these economic concepts to attain production efficiency. Economies have a choice to make concerning the amount of each product to produce at a given time, the kind of products they should increase and how they can efficiently allocate their resources to ensure that no resources remain to lie idle and that these resources are not in any way put to waste. Economic concepts are further simplified by the two good model used in the production possibility frontier. It is through this model that quantities that an economy can produce can be plotted. The two good model used in determining production efficiency illustrates how important decisions touching on the economy should be made to ensure that efficiency is attained in the selection of the kind of goods to be produced, optimum resource allocations and optimum allocation of goods in the economy among all the existing consumers.
References
Bauer, P. W. (1990). Recent developments in the econometric estimation of frontiers. Journal of econometrics, 46(1), 39-56.
Manning, R., & McMillan, J. (1999). Public intermediate goods, production possibilities, and international trade. Canadian Journal of Economics, 243-257.
Powell, A. A., & Gruen, F. (1968). The constant elasticity of transformation production frontier and linear supply system. International Economic Review,9(3), 315-328.
Schmidt, P. (1985). Frontier production functions. Econometric reviews, 4(2), 289-328.
Schmidt, P., & Sickles, R. C. (1984). Production frontiers and panel data.Journal of Business & Economic Statistics, 2(4), 367-374.
