Why is the production possibility frontier concave? Be sure to explain economic intuition behind that fact.

Answer 1

The production possibility frontier (PPF) is concave because of the concept of decreasing marginal returns. This means that as resources are shifted from one good to another, the additional output gained from each additional unit of input will decrease.

In simpler terms, as a country or company decides to produce more of one good and less of another, they will initially allocate resources that are most suited to production of the good with the highest return. This will result in a relatively small decrease in the production of the first good as resources are shifted to the second good. However, as more and more resources are shifted, the production of the first good will decline at a faster rate due to the inefficiency of using resources that are less and less suited for its production.

This leads to the concave shape of the PPF, as the opportunity cost of producing more of one good and less of another increases as more resources are reallocated. This concept illustrates the underlying economic trade-offs that need to be considered when making production decisions, and the importance of allocating resources efficiently in order to achieve optimal levels of production.