Opportunity Cost and Production Possibility Frontier
Opportunity cost, or alternative cost, refers to the cost of investing available resources into one economic opportunity at the expense of other available alternatives. It represents the best unrealized value.
The Production Possibility Frontier (PPF)
The Production Possibility Frontier (PPF) is the set of combinations of productive factors or technologies that reach peak production. It reflects the maximum quantities of goods and services that a company can produce in a given period using specific factors of production and knowledge. There are three situations in the productive structure of a country:
- Inefficient production structure: This occurs when production is below the PPF, meaning resources are not fully utilized (idle resources) or the technology is inadequate. Whenever a country has an unemployment rate above 5%, it is in an inefficient productive structure because it has a workforce that is not being used.
- Efficient production structure: This is situated on or close to the frontier. There are no idle resources, and the best available technology is being used.
- Unattainable production structure: This lies beyond the current possibilities of production. It is theoretical because no country can produce beyond its available means.
Characteristics of the PPF
The Production Possibility Frontier is concave and decreasing. This form is due to two reasons:
- Descending: To produce a greater quantity of one good, we must give up part of another good.
- Concave: The opportunity cost is increasing.
The Production Possibility Frontier can shift, meaning points that were previously unattainable can be reached. This shift may be due to technological improvements, capital increases, an increase in the number of workers, or the discovery of new natural resources.
Economic Operators and Their Roles
Operators are individuals or groups who undertake economic activity. There are four main types:
- Families (or households): They make decisions about what to consume.
- Companies: They make decisions regarding production and distribution.
- The Public Sector: This sector intervenes in the economy in three ways:
- Creating laws that govern the modus operandi of other operators when entering the market.
- Redistributing income.
- Offering lower-priced or free goods and services that society believes should be accessible to the entire population (e.g., military, health, education, water).
- The External Sector: A set of strategies undertaken by the public sector at the international level to serve the needs of a particular nation.
Functions of Economic Agents in a Mixed Economy
Consumption, production, and distribution are human activities intended to sustain the economy. The characteristics of economic agents in a mixed market economy are:
Consumers: Grouped into families or households, they decide which goods and services to consume to best meet their needs according to what provides the most utility. Utility is defined by what interests a consumer (based on preference, necessity, etc.). These agents are consumption traders who seek to maximize their satisfaction while minimizing costs.
Companies: They make decisions on the production and distribution of goods and services to maximize profit (Profit = Income – Costs). These are considered production operators.
The Public Sector: This consists of various government bodies whose main objective is to maximize social welfare through decision-making. In this context, theoretical profit is equal to zero, meaning the value earned is equal to the value consumed for public benefit.