Suppose that given the production functions of X and Y (that is, the physical conditions of production) and the quantity of K and L allocated to each output, society is at a point of the
production possibility frontier where 1 unit of Y substitutes for 1 unit of X or, alternatively, that the cost of production of X in terms of Y is 1 (this is called the rate of transformation of Y to X).
With more goods than factors, it is possible for the economy's static
production possibility frontier to be a hyperplane in the multi-dimensional commodity space of goods available at a given time.
Rational behavior, joined with long run competitive market forces, are assumed to force the economy to produce along the
production possibility frontier. Cultural differences can, therefore, not explain differences in productivity that are not expected to persist over time in a relatively competitive environment.
It seems, then, that a quality business consultant can help push a firm closer to its
production possibility frontier. How valuable that push can be for a company is something that can only be determined through further study.
In Figure 4, [PPF.sub.p] represents the
production possibility frontier of a planned economy in which output composition is fixed by the "centre" in point Ep, and does not match consumers' preferences (this point displays the deliberate violation of the Paretian condition that requires the marginal rate of transformation in production to equal marginal rates of substitution in consumption).
We postulate that such technical inefficiency, as measured by deviations from the
production possibility frontier, is a function of certain measurable economic and institutional variables.
In chapter 4, there is a clear analysis of how the cross-industry pollution externality creates the possibility of a nonconvex
production possibility frontier, a phenomenon described by Starrett [1972].
All of the results in that essay pertained to the closed economy case, that is, the case in which the economy's
production possibility frontier is specified for a given vector of inputs.
Speech, more than any policy narrative, causes nonlinearities of growth -- the leap outwards from the
production possibility frontiers.
