How is underutilization depicted on a production possibility frontier graph?


Quick Answer

Underutilization is depicted on a production possibility frontier graph by a point located between the origin and the production possibility frontier itself. The economy has not efficiently allocated its resources at such a point and is falling short of its production potential.

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Full Answer

The production possibility frontier graph depicts all combinations of output achievable by an economy producing two types of goods. The production possibility frontier itself consists of every combination of the two types of goods produced at the economy?s maximum capacity. Points between the frontier and origin indicate production below capacity, while those outside the frontier indicate levels of output that the economy cannot achieve. If a line is drawn from a given point to the origin and that line intersects the production possibility frontier, that point is outside the frontier.

The production possibility frontier graph demonstrates opportunity cost in an economy with two choices. Opportunity cost can be defined as the cost of choosing one item in terms of another item. For example, if an economy producing guns and butter at full production potential wishes to produce more butter, that economy has to produce fewer guns. The decline in the production of guns is the opportunity cost. This tradeoff is absent only if the economy is at a point below its full potential, in which case it can produce more butter (or more guns) without making sacrifices.

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