Rethinking Production Possibility Frontier in a Time of Pandemic

I cannot stop think about the Production Possibility Frontier (PPF) after writing the earlier blog on Trump and Cuomo tradeoffs. This one contains my thoughts that cover the more advanced aspects of the topic.

Lesson learned: Never draft and publish blogs in WordPress directly! It is not reliable as I published a blog last night but this morning it just disappeared without leaving a trace! I have to rewrite it again based on my memory. At a minimum, download the blog after finishing so you have something to fall back just in case.

1. Production Possibility Frontier (PPF) is to economics like bread and water is to human body.
2. Several fundamental ideas are presented in an intuitive graph, making it an excellent piece of teaching and learning.
3. What can we learn from the pandemic for PPF? Resources must be in full use and used efficiently to reach PPF. All authors have mentioned efficient use but not full use like this Wikipedia piece did. Lately I found myself using the “full use” as a criterion to judge the quality of the definition.
4. Why does “full use” matter? Because a PPF denotes the maximum level of outputs, which presume all resources are utilized. Think of the healthcare resources during the pandemic, ventilator in particular. They have been in full use and are still in short supply.
5. Note “full use” refers to a short term, not necessarily an instantaneous moment. In New York if some healthcare resources are still in reserve but they expect incoming patients will soon use them all, that would still be considered full use.
6. Should we treat “full use” as a part of “efficient use”, in the sense that not using all resources automatically means some kind of inefficiency or waste? I would argue to treat them separately, for the simple reason that sometimes resources are in short supply, so we must use them all. Yet there is no guarantee that we will use them efficiently.
7. Resources in full use add tension to tradeoff. Just think of the choice medical staff have to make regarding whom the ventilator they should give to! A PPF cuts us little slack during a crisis.
8. On the other hand, the short supply of healthcare resources relative to demand drags the PPF inward or to the origin, which is common in natural disasters.
9. Using everyday language, a PPF is simply what we can achieve under constraint of resource scarcity. We may or may not have reached the level, but it is certainly reachable. The word “can” points to a possibility, while “achieve” is more generic than “produce” and refers to goals may or may not related to production. Either way, the PPF is about outputs or result in the end.
10. Can a PPF tell us how much a product (or a goal) can be individually produced (or achieved)? Yes! To convince yourself, just look at a PPF, move the cursor to a point on the curve, then draw a vertical and a horizontal line from the point to the corresponding axis, now you will see how much is produced (or achieved) for each good (or goal) individually. Combining the two individual amounts will get you the joint amount produced or achieved.
11. Another easy place to see how much each good (goal) can be produced (achieved) is to move to the extreme points where one good /goal is produced /achieved fully while another has a zero amount. However, just because only one good /goal is produced /achieved does not mean there is no tradeoff, which exists whenever there is more than one option.
12. Similarly, just because a PPF tells you how much each good /goal can be produced (achieved) individually does not mean goods /goals are produced /achieved in isolation. Anytime you place two goods (goals) in a tradeoff, they will be in lockstep and what you do to one good (goal) will impact the other one.
13. A graph of PPFs can have multiple curves, including existing PPF and another one that shifts either outward or inward.
14. A PPF can have increasing, decreasing and constant opportunity costs, which lead to different graphic shapes. The most common shape is increasing opportunity cost, which is related to diminishing marginal returns. However, decreasing and constant opportunity costs are possible in international business, where economy of scale makes opportunity cost decreasing.
15. The interpretation of a PPF with an increasing opportunity cost is easy: When you move along the bulged-out PPF curve from upper left (i.e., saving fewer lives and more production) to lower right (i.e., saving more lives and less production) you must sacrifice more units of production for each additional life saved.
16. I know “more units of production” is not accurate. But if you really want to know exactly how many production units will be lost for every additional life saved, the answer is “It depends!” All we can say with an increasing opportunity cost is that every additional life saved will lead to higher and higher production units lost.
17. We must know the slopes of the curve at different points to give you a quantifiable and accurate answer. Interestingly, if you have a PPF with constant opportunity cost, we will see a straight line, not curve. The nice thing there is that throughout the line there is just one slope, making prediction much easier.
18. One advantage of PPF with variable opportunity cost, either increasing or decreasing, is that you can find out the points where the slope changes faster or more than other points and use that to determine the best course of action like I did in the other blog. Sometimes we can use those points as allocative efficient ones, especially when it is hard to get social consensus.
19. It is best to see a PPF curve as made of many points linked together, much like small beads threaded by a string into a neck-let. All points on a PPF share one thing in common: They are all productively efficient combinations of two goods (goals) produced (achieved), in the sense that it is impossible to increase production (achievement) of one good (goal) without decreasing production (achievement) of the other, given the current technology. From a cost perspective, productive efficiency is when short run average cost meets marginal cost.
20. Being productive efficient does not mean allocative efficient, the latter however is harder to pinpoint. It is easier sometimes to identify the allocative inefficient points.
21. The two goods (goals) in a PPF are symmetric, unlike in a regression model where one is dependent another independent variables. This means you can switch their positions freely in the graph. In my original graph I put Saving lives on the vertical axis and Saving production horizontal, later I switched them around without altering the interpretation.