A production possibilities frontier will be bowed out if, the marginal cost of producing an additional unit is greater than the price that can be obtained from selling it. This means that at some point we will have to stop producing items because they are costing us more money then they are making us. This theory has been used to explain how the Soviet Union collapsed. The Soviets made things that were only profitable when the marginal cost of production was less than the price they could get for it on world markets, but at some point investments in new production capacity and machinery began costing more than what they would be able to sell them for. The graph below shows a hypothetical example with two points: A) where investing is profitable (MC=P) B) where investment becomes unprofitable (MC > P): If we begin from Point A rather then Point B, then at some point producing an additional unit will no longer make sense because its production costs are greater than our selling price. As such if you’re working backwards towards

LEAVE A REPLY

Please enter your comment!
Please enter your name here