5.5 Summary

Things you should know

• A resource constraint describes the resources available to an agent, which may be devoted to the production of different goods.
• The production possibilites set is the set of all possible outputs an agent can produce, given their resource constraint and their available technologies described by their production functions.
• The production possibilities frontier (PPF) is the boundary of the production possibilities set.
• Along the PPF, the agent faces a tradeoff: they can produce more of one good only if they produce less of another. The degree of this tradeoff is called the marginal rate of transformation (MRT).

Things you should be able to do

Given any two production functions $f_1(L_1)$ and $f_2(L_2)$, and a labor constraint $\overline L$, you should be able to:

• Derive the equation of the PPF
• Plot the PPF
• Interpret the slope of the PPF as the opportunity cost of producing another unit of good 1