Prices and the Generalized Production Possibilities Frontier

Development Economics X Paper Model Nineteen


In this paper, we propose a generalization of the Production Possibilities Frontier (PPF) that incorporates prices. Price is the difference in marginal utility or cost between two agents, which drives the exchange of goods or services. The slope of the PPF could be seen as the price ratio between two goods or services, which determines how much of one good or service must be given up to produce more of another good or service. Prices are taken as given and provided by an institution. We show that the standard PPF, derived from Pareto Efficiency, has some limitations in capturing complex scenarios of interest to both microeconomists and macroeconomists. We introduce a more general PPF, that can accommodate more shapes and cases and unpack scenarios ranging from production functions, utility functions, social welfare functions, budget constraints, and technological change. We also prove that the standard PPF is a special case of the general PPF. The key insight is a novel relationship between three variables: prices, or the difference in value between two goods or services; trade, or the rate of exchange; and the amount of utility that is lost as opportunity cost per unit of good or service that passes through a point in a market.

Opoku-Agyemang, Kweku (2024). "Prices and the Generalized Production Possibilities Frontier." Development Economics Paper Model Nineteen. 

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