The study of economics does not presume to tell a society what choice it should make along its production possibilities frontier. This production possibilities frontier shows a tradeoff between devoting social resources to healthcare and devoting them to education. This can be illustrated by the PPFs of the two countries in the following graphs. 18. Expanding snowboard production to 51 snowboards per month from 50 snowboards per month requires a reduction in ski production to 98 pairs of skis per month from 100 pairs. In radios? PPF slopes downwards: PPF shows all the maximum possible combination of two goods, which can be produced with the available resources and technology. a. better suited for the production of some goods than others. The second plant, while smaller than the first, was designed to produce snowboards as well as skis. Why is the PPF downward sloping? The PPF is downward sloping because it depicts the trade-off between two products. Where does the PPF come from? Created by Sal Khan. By 1933, more than 25% of the nations workers had lost their jobs. Learn more about how Pressbooks supports open publishing practices. Now suppose that a large fraction of the economys workers lose their jobs, so the economy no longer makes full use of one factor of production: labor. Suppose it considers moving from point B to point C. What would the opportunity cost be for the additional education? At A all resources go to healthcare and at B, most go to healthcare. If it chooses to produce at point A, for example, it can produce FA units of food and CA units of clothing. The curvature of the production possibilities frontier shows that as additional resources are added to education, moving from left to right along the horizontal axis, the original gains are fairly large, but gradually diminish. PPF is more likely to be a downward-sloping curve that is bowed outward than a downward-sloping straight line because most resources are NOT: relatively cheap at low levels of output. b. used efficiently. This production possibilities curve shows an economy that produces only skis and snowboards. The reason for the shape of the Production Possibilities Curve (PPC) is something called the law of increasing opportunity costs. . To understand why the PPF is curved, start by considering point A at the top left-hand side of the PPF. This situation would be extreme and even ridiculous. Specialization implies that an economy is producing the goods and services in which it has a comparative advantage. Because the PPF is downward sloping from left to right, the only way society can obtain more education is by giving up some healthcare. The PPF is a simple economic model (usually demonstrated as a graph) that helps explain the potential output in an economy given the available resources. This graph shows two images. An inefficient machine operates at high cost, while an efficient machine operates at lower cost, because it is not wasting energy or materials. In the second case, as resources grow over a period of years (e.g., more labor and more capital), the economy grows. (I mean, we should move point A higher and don't change point F.) The question about task 1 in Self-Check questions, "Output mixes that had more healthcare (and less education) would have a steeper ray, while those with more education (and less healthcare) would have a flatter ray.". Each of the plants, if devoted entirely to snowboards, could produce 100 snowboards. The production possibilities curves for the two plants are shown, along with the combined curve for both plants. What is a budget constraint? The production of both goods rises. How is it different? Thus, all choices along a given PPF like B, C, and D display productive efficiency, but R does not. Conversely, the U.S. can produce large amounts of wheat per acre, but not much sugar cane. Direct link to vlad.guboy's post "Output mixes that had mo, Lesson 3: Production possibilities frontier. Suppose the first plant, Plant 1, can produce 200 pairs of skis per month when it produces only skis. Understand specialization and its relationship to the production possibilities model and comparative advantage. Thus, the slope of a PPF starts flat and becomes increasingly steeper. 2. it, Posted 2 years ago. The sensible thing for it to do is to choose the plant in which snowboards have the lowest opportunity costPlant 3. PP curve slopes down from left to right because in presence of scarcity of resources more of one good can be produced only if resources are withdrawn from production of other good. Due to the limitation of resources and technology, if the economy. As we combine the production possibilities curves for more and more units, the curve becomes smoother. Countries tend to have different opportunity costs of producing a specific good, either because of different climates, geography, technology or skills. Thats the trade-off this society faces. Characteristics of PPF: The two basic characteristics or features of PPF are: 1. It illustrates the production possibilities model. Why is the PPF downward sloping? Production and employment fell. In this case we have categories of goods rather than specific goods. The U.S. PPF is flatter than the Brazil PPF implying that the opportunity cost of wheat in term of sugar cane is lower in the U.S. than in Brazil. In image (b), the U.S.s Sugar Cane production is nearly half the production of its wheat. An Emerging Consensus: Macroeconomics for the Twenty-First Century, 33.1 The Nature and Challenge of Economic Development, 33.2 Population Growth and Economic Development, 34.1 The Theory and Practice of Socialism, 34.3 Economies in Transition: China and Russia, Appendix A.1: How to Construct and Interpret Graphs, Appendix A.2: Nonlinear Relationships and Graphs without Numbers, Appendix A.3: Using Graphs and Charts to Show Values of Variables, Appendix B: Extensions of the Aggregate Expenditures Model, Appendix B.2: The Aggregate Expenditures Model and Fiscal Policy. It had enjoyed seven years of dramatic growth and unprecedented prosperity. The teachers, though, are good at education, and not very good at healthcare. They continued to fall for several years. ANSWER: c 19. The shape of the PPF is typically curved outward, rather than straight. Panel (a) of Figure 2.6 Production Possibilities for the Economy shows the combined curve for the expanded firm, constructed as we did in Figure 2.5 The Combined Production Possibilities Curve for Alpine Sports. For example, after not spending much at all on crime reduction, when a government spends a certain amount more, thegains in crime reduction could be relatively large. This situation would be extreme and even ridiculous. Where will it produce the calculators? Instead of the bowed-out production possibilities curve ABCD, we get a bowed-in curve, ABCD. This is because its slope is given by the relative prices of the two goods, which from the point of view of an individual consumer, are fixed, so the slope doesn't change. Direct link to nishankpatil25's post How to use clear it up fe, Posted 3 years ago. Textbook content produced by OpenStax is licensed under a Creative Commons Attribution License . Also, explain why all points inside of that curve represent inefficient outcomes. How would this affect the production possibilities curve and, in particular, how would it affect the opportunity cost of education? Most importantly, the production possibilities frontier clearly shows the tradeoff between healthcare and education. To construct a combined production possibilities curve for all three plants, we can begin by asking how many pairs of skis Alpine Sports could produce if it were producing only skis. It is clear that productive inefficiency is a waste since resources are being used in a way that produces less goods and services than a nation is capable of. The table shows the combinations of pairs of skis and snowboards that Plant 1 is capable of producing each month. We can show the particular mix of goods and services producedthat is, the specific combination of selected healthcare and education along the production possibilities frontieras a ray (line) from the origin to a specific point on the PPF. It can produce skis and snowboards simultaneously as well. A production possibilities frontier defines the set of choices society faces for the combinations of goods and services it can produce given the resources available. Plant S has a comparative advantage in producing radios, so, if the firm goes from producing 150 calculators and no radios to producing 100 radios, it will produce them at Plant S. In the production possibilities curve for both plants, the firm would be at M, producing 100 calculators at Plant R. Principles of Economics by University of Minnesota is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted. Because the production possibilities curve for Plant 1 is linear, we can compute the slope between any two points on the curve and get the same result. Opportunity Cost Increases Along the PPF You may have noticed that the PPF was drawn such that it is bowed out from the origin. While the slope is not constant throughout the PPFs, it is quite apparent that the PPF in Brazil is much steeper than in the U.S., and therefore the opportunity cost of wheat is generally higher in Brazil. When government spends a certain amount more on reducing crime, for example, the original increase in opportunity cost of reducing crime could be relatively small. Theres another way to think about this. The production possibilities frontier can illustrate two kinds of efficiency: productive efficiency and allocative efficiency. Also, the simplified PPF does not show demand. It retains its negative slope and bowed-out shape. Figure 2.4 Production Possibilities at Three Plants. An economy that fails to make full and efficient use of its factors of production will operate inside its production possibilities curve. The curve of the production possibilities frontier shows that as additional resources are added to education, moving from left to right along the horizontal axis, the initialgains are fairly large, but those gains gradually diminish. This section of the chapter will explain the constraints society faces, using a model called the production possibilities frontier (PPF). The law of increasing opportunity cost tells us that, as the economy moves along the production possibilities curve in the direction of more of one good, its opportunity cost will increase. Had the firm based its production choices on comparative advantage, it would have switched Plant 3 to snowboards and then Plant 2, so it would have operated at point C. It would be producing more snowboards and more pairs of skisand using the same quantities of factors of production it was using at B. Because society has limited resources (e.g., labor, land, capital, raw materials) at any point in time, there is a limit to the quantities of goods and services it can produce. Factors of production (labor, capital, land) Is the PPF bowed or straight? Suppose it considers moving from point B to point C. What would be the opportunity cost for the additional education? View Answer. Figure 2.4 Production Possibilities at Three Plants shows production possibilities curves for each of the firms three plants. Most important, the production possibilities frontier clearly shows the tradeoff between healthcare and education. Take another look at the production possibilities frontier in this video about the imaginary Econ Isle.. The opportunity cost would be the health care that society has to give up. Conversely, the U.S. can produce a lot of wheat per acre, but not much sugar cane. Both images have y-axes labeled Sugar Cane and x-axes labeled Wheat. In image (a), Brazils Sugar Cane production is nearly double the production of its wheat. The production possibilities frontier is downward sloping: producing more of one good requires producing less of others. Alpine Sports can thus produce 350 pairs of skis per month if it devotes its resources exclusively to ski production. At point A, the economy was producing SA units of security on the vertical axisdefense services and various forms of police protectionand OA units of other goods and services on the horizontal axis. Society can choose any combination of the two goods on or inside the PPF. It is hard to imagine that most of us could even survive in such a setting. If every trade-off were the same, it would create a straight line. Neither skis nor snowboards is an independent or a dependent variable in the production possibilities model; we can assign either one to the vertical or to the horizontal axis. Ski sales grew, and she also saw demand for snowboards risingparticularly after snowboard competition events were included in the 2002 Winter Olympics in Salt Lake City. Clearly, Brazil has a lower opportunity cost of producing sugar cane (in terms of wheat) than the U.S. Imagine that you are suddenly completely cut off from the rest of the economy. Alpine thus gives up fewer skis when it produces snowboards in Plant 3. The OpenStax name, OpenStax logo, OpenStax book covers, OpenStax CNX name, and OpenStax CNX logo That is certainly one possible way of allocating a societys resources, but it would mean there would be no resources left for education. Now consider what would happen if Ms. Ryder decided to produce 1 more snowboard per month. A movement from A to B requires shifting resources out of the production of all other goods and services and into spending on security. Suppose further that all three plants are devoted exclusively to ski production; the firm operates at A. Suppose it considers moving from point B to point C. What would the opportunity cost be for the additional education? As it does, the production possibilities frontier for a society will shift outward and society will be able to afford more of all goods. And is this the case of allocative inefficiency? An inefficient organization operates with long delays and high costs, while an efficient organization meets schedules, is focused, and performs within budget. The opportunity cost of the first 200 pairs of skis is just 100 snowboards at Plant 1, a movement from point D to point C, or 0.5 snowboards per pair of skis. Similarly, as additional resources are added to health care, moving from bottom to top on the vertical axis, the initialgains are fairly large but again gradually diminish. As we saw earlier, the curvature of a countrys PPF gives us information about the tradeoff between devoting resources to producing one good versus another. The PPF graph is major simplification of the real world. If society has a total of 10 teachers, education can be provided to a maximum of 250 students. Thus, the slope is different at various points on the PPF. Suppose it considers moving from point B to point C. What would the opportunity cost be for the additional education? Plant 3 would be the last plant converted to ski production. Suppose the firm decides to produce 100 radios. Figure 2.5 The Combined Production Possibilities Curve for Alpine Sports. To find this quantity, we add up the values at the vertical intercepts of each of the production possibilities curves in Figure 2.4 Production Possibilities at Three Plants. While every society must choose how much of each good or service it should produce, it does not need to produce every single good it consumes. But the direction that PPF is curved comes from the way that the trade-offs change. Comparative advantage thus can stem from a lack of efficiency in the production of an alternative good rather than a special proficiency in the production of the first good. Thus, the production possibilities curve not only shows what can be produced; it provides insight into how goods and services should be produced. Due to its climatic conditions, Brazil can produce quite a bit of sugar cane per acre but not much wheat. While every society must choose how much of each good it should produce, it does not need to produce every single good it consumes. Producing more skis requires shifting resources out of snowboard production and thus producing fewer snowboards. In contrast, the PPF has a curved shape because of the law of the diminishing returns. Much of the land in the United States has a comparative advantage in agricultural production and is devoted to that activity. then you must include on every physical page the following attribution: If you are redistributing all or part of this book in a digital format, If it fails to do that, it will operate inside the curve. Want to create or adapt books like this? The following graph illustrates these ideas using a production possibilities frontier between healthcare and education. Suppose society has chosen to operate at point B, and it is considering producing more education. If youve ever pulled an all-nighter, youre probably familiar with the law of diminishing returns: as the night wears on and you get tired,every additional hour you studyis a little less productive than the one before. 2.3 Applications of the Production Possibilities Model, 4.2 Government Intervention in Market Prices: Price Floors and Price Ceilings, 5.2 Responsiveness of Demand to Other Factors, 7.3 Indifference Curve Analysis: An Alternative Approach to Understanding Consumer Choice, 8.1 Production Choices and Costs: The Short Run, 8.2 Production Choices and Costs: The Long Run, 9.2 Output Determination in the Short Run, 11.1 Monopolistic Competition: Competition Among Many, 11.2 Oligopoly: Competition Among the Few, 11.3 Extensions of Imperfect Competition: Advertising and Price Discrimination, 14.1 Price-Setting Buyers: The Case of Monopsony, 15.1 The Role of Government in a Market Economy, 16.1 Antitrust Laws and Their Interpretation, 16.2 Antitrust and Competitiveness in a Global Economy, 16.3 Regulation: Protecting People from the Market, 18.1 Maximizing the Net Benefits of Pollution, 20.1 Growth of Real GDP and Business Cycles, 22.2 Aggregate Demand and Aggregate Supply: The Long Run and the Short Run, 22.3 Recessionary and Inflationary Gaps and Long-Run Macroeconomic Equilibrium, 23.2 Growth and the Long-Run Aggregate Supply Curve, 24.2 The Banking System and Money Creation, 25.1 The Bond and Foreign Exchange Markets, 25.2 Demand, Supply, and Equilibrium in the Money Market, 26.1 Monetary Policy in the United States, 26.2 Problems and Controversies of Monetary Policy, 26.3 Monetary Policy and the Equation of Exchange, 27.2 The Use of Fiscal Policy to Stabilize the Economy, 28.1 Determining the Level of Consumption, 28.3 Aggregate Expenditures and Aggregate Demand, 30.1 The International Sector: An Introduction, 31.2 Explaining InflationUnemployment Relationships, 31.3 Inflation and Unemployment in the Long Run, 32.1 The Great Depression and Keynesian Economics, 32.2 Keynesian Economics in the 1960s and 1970s, 32.3. (Many students are helped when told to read this result as 2 pairs of skis per snowboard.) We get the same value between points B and C, and between points A and C. Figure 2.2 A Production Possibilities Curve. Suppose society has chosen to operate at point B, and it is considering producing more education. Suppose it considers moving from point B to point C. What would the opportunity cost be for the additional education? A concave curve is one that bends outward from the origin. The U.S. PPF is flatter than the Brazil PPF implying that the opportunity cost of wheat in terms of sugar cane is lower in the U.S. than in Brazil. The opportunity cost of an additional snowboard at each plant equals the absolute values of these slopes. This situation would be extreme and even ridiculous. Because society has limited resources (e.g., labor, land, capital, raw materials) at any point in time, there is a limit to the quantities of goods and services it can produce. In our example, all three plants are equally good at snowboard production. The slope of the PPF gives the opportunity cost of producing an additional unit of wheat. .How would you define a production point that represent efficient versus inefficient use of the resources? The first is the fact that the budget constraint is a straight line. If it were to allocate all of its resources to education, it could produce at point F. Alternatively, the society could choose to produce any combination of healthcare and education shown on the production possibilities frontier. Productive efficiency means it is impossible to produce more of one good without decreasing the quantity that is produced of another good. Suppose a society allocated all of its resources to producing health care. Because the PPF is downward sloping from left to right, the only way society can obtain more education is by giving up some healthcare. Figure 2.3 The Slope of a Production Possibilities Curve. Allocative efficiency means that the particular mix of goods being producedthat is, the specific choice along the production possibilities frontierrepresents the allocation that society most desires. Producing more snowboards requires shifting resources out of ski production and thus producing fewer skis. In either case, production within the production possibilities curve implies the economy could improve its performance. The table in Figure 2.2 A Production Possibilities Curve gives three combinations of skis and snowboards that Plant 1 can produce each month. Most important, the production possibilities frontier clearly shows the tradeoff between healthcare and education. An economy achieves a point on its production possibilities curve only if it allocates its factors of production on the basis of comparative advantage. Clearly not. Suppose that Alpine Sports is producing 100 snowboards and 150 pairs of skis at point B. One can easily see this with a simple observation of the extreme production points in the PPFs of the two countries. Suppose there is an improvement in medical technology that enables more healthcare to be provided with the same amount of resources. However, putting those marginal dollars into education, which is completely without resources at point A, can produce relatively large gains. Suppose society has chosen to operate at point B, and its considering producing more education. The slope between points B and B is 2 pairs of skis/snowboard. Plant 3 has a comparative advantage in snowboard production because it is the plant for which the opportunity cost of additional snowboards is lowest. An outward shift in the production possibilities frontier (PPF) indicates an expansion in the economy caused by a change in technology or an increase in resources. Should the government promote the product or what? The opportunity cost would be the healthcare society has to give up. Draw and explain what would happen to this market if an . There are more similarities than differences between individual choice and social choice. The economy produces SA units of security and OA units of all other goods and services per period. Similarly, as additional resources are added to healthcare, moving from bottom to top on the vertical axis, the original gains are fairly large, but again gradually diminish. With trade, manufacturers produce goods where the opportunity cost is lowest, so total production increases, benefiting both trading parties. Economists conclude that it is better to be on the production possibilities curve than inside it. The specific choice along a production possibilities frontier that reflects the mix of goods society prefers is the choice with allocative efficiency. Suppose a society desires two products, healthcare and education. Direct link to tamaraqonitam's post What happen if society wa, Posted 3 months ago. We would say one teacher could produce 25 students worth of education using the education processes available. Notice the curve still has a bowed-out shape; it still has a negative slope. In Welcome to Economics! Now consider the other end, at the lower right, of the production possibilities frontier. In that case, it produces no snowboards. Why is a production possibilities frontier typically drawn as a curve, rather than a straight line? A production possibilities curve is a graphical representation of the alternative combinations of goods and services an economy can produce. That will require shifting one of its plants out of ski production. It has two plants, Plant R and Plant S, at which it can produce these goods. The opportunity cost of each of the first 100 snowboards equals half a pair of skis; each of the next 100 snowboards has an opportunity cost of 1 pair of skis, and each of the last 100 snowboards has an opportunity cost of 2 pairs of skis. The curvature of the production possibilities frontier shows that as we add more resources to education, moving from left to right along the horizontal axis, the original increase in opportunity cost is fairly small, but gradually increases. Bowed when -factors of production are heterogeneous (Some laborers are better at one thing than the other) OR In Plant 2, she must give up one pair of skis to gain one more snowboard. Did you have an idea for improving this content? Our mission is to improve educational access and learning for everyone. However, we drew the production possibilities frontier for healthcare and education as a curved line. A production possibilities frontier showing health care and education. In this example, production moves to point B, where the economy produces less food (FB) and less clothing (CB) than at point A. In effect, the production possibilities frontier plays the same role for society as the budget constraint plays for Alphonso. When you open your PPF Account you will get a pass-book which will be updated everytime you make a transaction. If it were to allocate all of its resources to education, it could produce at point F. Alternatively, the society could choose to produce any combination of healthcare and education on the production possibilities frontier. At A all resources go to healthcare and at B, most go to healthcare. we learned that every society faces the problem of scarcity, where limited resources conflict with unlimited needs and wants. In other words, the products are limited because the resources are limited. and you must attribute OpenStax. For example, children are seeing a doctor every day, whether theyre sick or not, but not attending school. Because an economys production possibilities curve assumes the full use of the factors of production available to it, the failure to use some factors results in a level of production that lies inside the production possibilities curve. That is the tradeoff society faces. Production of all other goods and services falls by OA OB units per period. Direct link to Al's post 1. Direct link to Martin's post What is a budget constrai, Posted 3 years ago. Understand the difference between comparative advantage and . The increase in resources devoted to security meant fewer other goods and services could be produced. The negative slope of the production possibilities curve reflects the scarcity of the plants capital and labor. In addition, over time, improvements in technology can increase the level of production with given resources, and hence push out the PPF. budget line) will be constant, but when there is more than one scarce resources, the trade-off will be increasingly costly (e.g. Conversely, as we add more resources to healthcare, moving from bottom to top on the vertical axis, the original declines in opportunity cost are fairly large, but again gradually diminish. Total production can increase if countries specialize in the goods they have comparative advantage in and trade some of their production for the remaining goods. Plant R has a comparative advantage in producing calculators. However, for both the government and the market economy in the short term, increases in production of one good typically mean offsetting decreases somewhere else in the economy. We shall consider two goods and services: national security and a category we shall call all other goods and services. This second category includes the entire range of goods and services the economy can produce, aside from national defense and security. hover over link. However, improvements in productive efficiency take time to discover and implement, and economic growth happens only gradually. The example of choosing between catching rabbits and gathering berries illustrates how opportunity cost works. The law of increasing opportunity cost holds that as an economy moves along its production possibilities curve in the direction of producing more of a particular good, the opportunity cost of additional units of that good will increase. At point A, all available resources (i.e. The result is the bowed-in curve ABCD. In other words, each resource is not worth the same at producing different products. So it is constant because the slope is constantly the same. What determines how far a PPF is from the origin. In Panel (a) we have a combined production possibilities curve for Alpine Sports, assuming that it now has 10 plants producing skis and snowboards. The exhibit gives the slopes of the production possibilities curves for each plant. In everyday usage, efficiency refers to lack of waste. Because at any given moment, society has limited resources, it follows that theres a limit to the quantities of goods and services it can produce. Thus, the slope of the PPF is relatively steep near the horizontal-axis intercept. If all resources in the economy where allocated to produci. Explain why societies cannot make a choice above their production possibilities frontier and should not make a choice below it.
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