In economics, a production possibilities frontier (PPF) or transformation curve is a graph that shows the different quantities of two goods

that an economy (or agent) could efficiently produce with limited productive resources. Points along the curve describe the trade-off between the two goods, that is, the opportunity cost. Opportunity cost here measures how much an additional unit of one good costs in units forgone of the other good. The curve illustrates that increasing production of one good reduces maximum production of the other good as resources are transferred away from the other good. The slope of the production possibilities frontier (PPF) at any given point is called the marginal rate of transformation (MRT). It describes numerically the rate at which one good can be transformed into the other. It is also called the (marginal) "opportunity cost of a commodity, that is, it is the opportunity cost of X in terms of Y at the margin. It measures how much of good Y is given up for one more unit of good X or vice versa. The shape of PPF is commonly drawn as concave downward to represent increasing opportunity cost with increased output of a good. Thus, MRT increases in absolute size as one moves from the top left of the PPF to the bottom right of the PPF. While the PPF gives the efficient points of output combinations of different ( simplied case,2) goods,

which combination will the society choose? The optimal choice among different efficient points on the PPF would be the one that also gives us the highest satisfaction ( total utility of consumption). The Utility functiontell which point gives what satisfaction. We know that the indiffernce curves will indicate which point has the highest utility among the points on the PPF. It will be the point at which an indifference curve is tangential to the PPF. In other words, at this point of utility maximization within the given resource constraint and the production technolgy, the slope of the indifference curve and the slope of the PPF curve is equal. The slope of the indifference curve is nothing but the marginal rate of subsitution (MRS) while the slope of the PPF is the marginal rate of transformation (MRT). Therfore MRS = MRT. Now, MRS is nothing but the ratio of marginal utility (MUa/MUb) where a and b stands for the two goods being consumed. How does the cost and price enter the scheme? From consumer behavior theory we know if the consumer is in equilibrium and made the decision on the basis of prices of the goods in question and the consumers income or budget constraint. The consumer is in equilibrium, utility maximization and hence the ratiio of Mus equal the ratio of prices. Therefore, MRS= MUa/MUb= Pa/Pb. We also know that the producers of goods are in

equlibrium when the marginal cost ratio of the goods in question equals the ratio of the prices ofgoods. Thus, MRS = Mua/MUb= Pa/Pb. We also know that the producer are in equlibrium when the price ratio exactly equals the ratio of marginal costs of these goods. So, MRT - MCa/ MCb. So, we get MUa/MUb = MRS =Pa/Pb = MCa/MCb = MRT? 6 years ago