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The production-possibility frontier is an economic concept used to describe how much a company can rationally be expected to produce. The production-possibility frontier determines whether a company is using its resources efficiently or not. Past the production-possibility frontier, returns start to diminish and the business becomes less efficient.
In most cases, the production-possibility frontier is a concept that is displayed on a graph. A production-possibility curve is used to illustrate the ideal level of production for a particular company. It will be charted to determine whether a company is producing goods in the best way possible. This curve is used to determine exactly where a production system is and whether it can be improved.
If production has surpassed the production-possibility frontier, the company is not operating as efficiently as it should be. This deals with the law of diminishing marginal returns. After a certain point, putting in the same amount of resources into the production of a product will not net the same results as it once did. This can happen for a number of reasons and has been well-documented in many industries.
If it is determined that the business is not operating as efficiently as it could, there are a number of different steps that could be taken. For example, it may be determined that the company needs to divert some of the resources being used in other areas to help in the production of the goods. In other cases, the company may need to divert some of the resources being used to produce goods into other departments. By taking these steps, the company can transition into a more efficient way of doing business and producing products.
One of the most important concepts to understand when dealing with a production-possibility frontier is opportunity cost. The term opportunity cost means that an individual has to give up the opportunity to do something when he or she allocates resources to something. A company only has so much time or money to invest. When a company or individual decides to put time into a particular project, it can no longer put any more time into another project. This means that every individual or company has to examine the opportunity costs involved with each decision in order to operate at the most efficient level that is possible.