Question

Fully explain why an inefficient resource allocation leads an economy to produce at a point inside its production possibilities frontier.

Answer 1

Production possibilities frontier, PPF, is defined as a representation of the point at which a country’s economy is most efficiently producing its goods and services. Efficient production means allocating its resources in the best way possible.

The points in the PPF shifts outward. The more efficient production is the more the PPF shifts outward. With this in mind, any point found inside the PPF means that there is inefficient resource allocation. If the PPF shifts inward, it means that the efficiency production is regressing and available resources are not fully used to its potential which will lead to a downward turn of the economy.