# Production Possibilities Curve And Inefficiency And Efficiency

After you have worked through this section of the learning unit, you should be able to:

• illustrate and explain point of inefficiency and technical efficiency

Inefficiency occurs when resources are not fully and efficiently used. Inefficiency means that the current output is lower than the potential output. The output that is produced as a result of the inefficient use of resources is therefore less than what is possible if the resources are fully and efficiently used.

In terms of our production possibilities curve, this is represented by a point such as H1 which lies inside the production possibilities curve. At point H1, 2 000 laptops and 10 000 mobile phones are produced, which is less than the potential output. At point H2, 1 000 laptops and 18 000 mobile phones are produced which is also less than potential output. By moving from point H1 to a point such as C, which is on the production possibilities curve, both more laptops and more mobile phones can be produced. Points inside the production possibility curve indicates that the society concerned is not making full and efficient use of its resources and consequently fewer needs and wants are satisfied than is possible.

While a point inside the production possibilities curve indicates that both more laptops and mobile phones can be produced, a point on the curve indicates that it is not possible to increase the production of one good without decreasing the production of the other good. For Zanadu, this implies that if it is producing at a point such as C, it can only move to point B if it produces fewer mobile phones and it can only move from point C to point D if it produces fewer laptops.

When a point on the production possibilities curve is reached, it is referred to as technical efficiency, indicating that resources are fully and efficiently used. This is the point that any society should strive to reach, since it indicates that the society is indeed making the best use of its scarce resources.

#### Activity

Now do the following activity to test your understanding of this concept:

The following information is issued for the year by the Department of Statistics in Paradiso:

Food production increased by 5%, while the production of guns remained unchanged.  Unemployment is currently at 24,5% and the manufacturers of guns and food reported that they are using 85% of their production capacity.

Based on the above information, indicate whether the following statements are true or false?

### Paradiso is at a point inside the production possibilities curve.

The statement is indeed true.

Paradiso is at a point inside the production possibilities curve. Because there is unemployment and firms are not making use of all their capacity, Paradiso is not making full use of all its resources and is at a point inside the production possibilities curve.

Think again.  The statement is true.

Paradiso is at a point inside the production possibilities curve. Because there is unemployment and firms are not making use of all their capacity, Paradiso is not making full use of all its resources and is at a point inside the production possibilities curve.

### Paradiso can increase the production of guns without decreasing the production of food.

The statement is indeed true.

Paradiso can increase the production of guns without decreasing the production of food. A possible point is D. It is possible for Paradiso to move from point H to point D. This indicates that it can produce more guns without decreasing the production of food.

Think again. The statement is true.

Paradiso can increase the production of guns without decreasing the production of food. A possible point is D. It is possible for Paradiso to move from point H to point D. This indicates that it can produce more guns without decreasing the production of food.

### Paradiso is technically efficient in its production of guns and food.

Think again.   The statement is false

They are at a point inside the production possibilities curves since they are not making efficient and fully use of their resources.

The statement is indeed false.

They are at a point inside the production possibilities curves since they are not making efficient and fully use of their resources.

### Paradiso is inefficient in its production of guns and food.

The statement is indeed true.

Paradiso is inefficient in its production of guns and food since it is not making full use of its resources. This indicates a position of inefficiency.

Think again.  The statement is true.

Paradiso is inefficient in its production of guns and food since it is not making full use of its resources. This indicates a position of inefficiency.

### Paradiso is at a point on the production possibilities curve.

Think again.  The statement is false.

They are at a point inside their production possibilities curve.  Paradiso is not technically efficient in its production of guns and food. There is unemployment and underutilisation of their capacity.

The statement is indeed false.

They are at a point inside their production possibilities curve and not at a point outside. Paradiso is not technically efficient in its production of guns and food. There is unemployment and underutilisation of their capacity.

### Paradiso is at a point outside the production possibilities curve.

Think again.  The statement is false.

They are at a point inside their production possibilities curve and not at a point outside.

The statement is indeed false.

They are at a point inside their production possibilities curve and not at a point outside.

### Which one of the following is correct?

If Paradiso is producing at point C, as indicated in the diagram, you can conclude the following:

Correct.

Point C is on the production possibilities curve indicating that Paradiso is efficient in the production of food and guns.

Think again.

Both points C and D are on the production possibilities curve; they are both points of technical efficiency. Point C is therefore not more efficient than point D.

Think again.

It is not possible to increase the production of food or guns without decreasing the production of the other good.

Think again.

To increase the production of food, they will have to decrease the production of guns.