Learn more about how Pressbooks supports open publishing practices. A budget constraint shows the different combinations of goods and services a consumer can purchase with their fixed budget. c. a downward-sloping straight line. False. Figure 2.6 Production Possibilities for the Economy. As you read this section, you will see parallels between individual choice and societal choice. Specialization implies that an economy is producing the goods and services in which it has a comparative advantage. Most importantly, the production possibilities frontier clearly shows the tradeoff between healthcare and education. Now draw the combined curves for the two plants. . Whats the difference between a budget constraint and a PPF? The gains to education from adding these last few resources to education are very small. At D most resources go to education, and at F, all go to education. Some workers are without jobs, some buildings are without occupants, some fields are without crops. If Alpine Sports selects point C in Figure 2.9 Efficient Versus Inefficient Production, for example, it will assign Plant 1 exclusively to ski production and Plants 2 and 3 exclusively to snowboard production. What happen if society wants less products than what are on the productive efficiency point? Between 1929 and 1942, the economy produced 25% fewer goods and services than it would have if its resources had been fully employed. The particular mix of goods and services being producedthat is, the specific combination of healthcare and education chosen along the production possibilities frontiercan be shown as a ray (line) from the origin to a specific point on the PPF. Take another look at the production possibilities frontier in this video about the imaginary Econ Isle.. Figure 2.8 Idle Factors and Production shows an economy that can produce food and clothing. I don't understand: if we don't raise amount of resourches for healtccare, why we reduce amount of resourches for education? The Production Possibilities Frontier (PPF) is a graph that shows all the different combinations of output of two goods that can be produced using available resources and technology. The shape of the PPF is typically curved outward, rather than straight. At A all resources go to healthcare and at B, most go to healthcare. Just as individuals cannot have everything they want and must instead make choices, society as a whole cannot have everything it might want, either. To understand why the PPF is curved, start by considering point A at the top left-hand side of the PPF. 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 choice is shown in Figure 1 at point A. A production possibilities frontier showing health care and education. Thus, the production possibilities curve not only shows what can be produced; it provides insight into how goods and services should be produced. There are more similarities than differences, so for now focus on the similarities. The reason for this difference is pretty simple: the slope of a budget line is defined as the ratio of the prices of the two goods or services. Hence the sudden mention of Alphonso. This curve depicts an entire economy that produces only skis and snowboards. Clearly, Brazil has a lower opportunity cost of producing sugar cane (in terms of wheat) than the U.S. The slopes of the production possibilities curves for each plant differ. The PPF captures the concepts of scarcity, choice, and tradeoffs. Suppose two countries, the US and Brazil, need to decide how much they will produce of two crops: sugar cane and wheat. Due to the limitation of resources and technology, if the economy wants to produce more units of good 1, it has to reduce the quantity of good 2, which depicts the downwards slope of the PPF. Such an allocation implies that the law of increasing opportunity cost will hold. The PPF is a graph showing all combinations of two goods that can be produced given the available resources. In particular, its slope gives the opportunity cost of producing one more unit of the good in the x-axis in terms of the other good (in the y-axis). This pattern is common enough that it has been given a name: the. This production possibilities frontier shows a tradeoff between devoting social resources to healthcare and devoting them to education. The PPF is downward sloping because it depicts the trade-off between two products. How do you define and measure opportunity cost using the PPF model? Understand specialization and its relationship to the production possibilities model and comparative advantage. While even smaller than the second plant, the third was primarily designed for snowboard production but could also produce skis. We can think of this as the opportunity cost of producing an additional snowboard at Plant 1. 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. Its land is devoted largely to nonagricultural use. For example, point R is productively inefficient because it is possible at choice C to have more of both goods: education on the horizontal axis is higher at point C than point R (E2 is greater than E1), and healthcare on the vertical axis is also higher at point C than point R (H2 is great than H1). If it is using the same quantities of factors of production but is operating inside its production possibilities curve, it is engaging in inefficient production. Because the PPF is downward sloping from left to right, the only way society can obtain more education is by giving up some healthcare. We can think of each of Ms. Ryders three plants as a miniature economy and analyze them using the production possibilities model. Opportunity Cost Increases Along the PPF You may have noticed that the PPF was drawn such that it is bowed out from the origin. In drawing production possibilities curves for the economy, we shall generally assume they are smooth and bowed out, as in Panel (b). In short, the slope of the PPF from point F to D would be steep, and the opportunity cost of education in terms of healthcare would be high. Thus, the slope of the PPF is relatively steep near the horizontal-axis intercept. However, additional increases typically cause relatively larger increases in the opportunity cost of reducing crime, and paying for enough police and security to reduce crime to nothing at all would be a tremendously high opportunity cost. Comparative advantage is not the same as absolute advantage, which is when a country can produce more of a good. 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. Much of the land in the United States has a comparative advantage in agricultural production and is devoted to that activity. Suppose Alpine Sports operates the three plants we examined in Figure 2.4 Production Possibilities at Three Plants. As time passes, the production possibilities frontier shifts outward due to the accumulation of inputs and technological progress. Wouldn't allocative efficiency occur at the origin? If all resources in the economy where allocated to produci. Economists conclude that it is better to be on the production possibilities curve than inside it. The production possibilities curve shown suggests an economy that can produce two goods, food and clothing. Notice also that this curve has no numbers. d. used to produce consumption goods. Neither skis nor snowboards is an independent or a dependent variable in the production possibilities model; we can assign either one to The curve is a downward-sloping straight line, indicating that there is a linear, negative relationship between the production of the two goods. Most important, the production possibilities frontier clearly shows the tradeoff between healthcare and education. What is allocative efficiency? It is hard to imagine that most of us could even survive in such a setting. 1.12 we . One, of course, was increased defense spending. This lawasserts that as additional increments of resources are devotedto a certain purpose, the marginal benefit from those additional increments will decline. labor, land, capital, raw materials, etc.). Thus, all choices along a given PPF like B, C, and D display productive efficiency, but R does not. Why Production Possibility Frontier is useful? Producing 100 snowboards at Plant 2 would leave Alpine Sports producing 200 snowboards and 200 pairs of skis per month, at point C. If the firm were to switch entirely to snowboard production, Plant 1 would be the last to switch because the cost of each snowboard there is 2 pairs of skis. When can PPC be a straight line? Explain the concept of the production possibilities curve and understand the implications of its downward slope and bowed-out shape. Explain. Due to its climatic conditions, Brazil can produce quite a bit of sugar cane per acre but not much wheat. This situation would be extreme and even ridiculous. Plant 3s comparative advantage in snowboard production makes a crucial point about the nature of comparative advantage. The production possibilities frontier can illustrate two kinds of efficiency: productive efficiency and allocative efficiency. 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. We shall examine the significance of the bowed-out shape of the curve in the next section. Since we have assumed that the economy has a fixed quantity of available resources, the increased use of resources for security and national defense necessarily reduces the number of resources available for the production of other goods and services. If it fails to do that, it will operate inside the curve. This video explains why PPC slopes downward with a simple examplePrevious concept - production possibility curve(link - https://youtu.be/gaZij24SJvk )Related. That is the tradeoff society faces. For government, this process often involves trying to identify where additional spending could do the most good and where reductions in spending would do the least harm. The downward sloping nature of the PPC is due to the law of increasing opportunity cost. The slope between points B and B is 2 pairs of skis/snowboard. Plant R has a comparative advantage in producing calculators. Point R on the graph represents the good that drops in quantity as a result of greater efficiency in producing other goods. 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. As you read this section, focus on the similarities. I don't agree with the statement that allocative efficiency must imply productive efficiency. An inefficient organization operates with long delays and high costs, while an efficient organization meets schedules, is focused, and performs within budget. ANSWER: c 19. Suppose it considers moving from point B to point C. . OpenStax is part of Rice University, which is a 501(c)(3) nonprofit. Now imagine that some of these resources are diverted from healthcare to education, so that the economy is at point B instead of point A. How to determine what a society desires can be a controversial question, and is usually a discussion in political science, sociology, and philosophy classes as well as in economics. Because the PPF is downward sloping from left to right, the only way society can obtain more education is by giving up some healthcare. Economists use a modelcalled the production possibilities frontier (PPF) to explain the constraints society faces in deciding what to produce. It can produce skis and snowboards simultaneously as well. This happens because some resources are better suited for producing certain goods and services instead of others. A concave curve is one that bends outward from the origin. In this way, the law of diminishing returns produces the outward-bending shape of the production possibilities frontier. It also suffered many human casualties, both soldiers and civilians. The related concept of marginal cost is the cost of producing one extra unit of something. The first is the fact that the budget constraint is a straight line. However, it does not have enough resources to produce outside the PPF. But the direction that PPF is curved comes from the way that the trade-offs change. Producing 1 additional snowboard at point B requires giving up 2 pairs of skis. Producing more snowboards requires shifting resources out of ski production and thus producing fewer skis. Specialization means that an economy is producing the goods and services in which it has a comparative advantage. In effect, the production possibilities frontier plays the same role for society as the budget constraint plays for Alphonso. Because the PPF is downward sloping from left to right, the only way society can obtain more education is by giving up some healthcare. 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 second plant, while smaller than the first, was designed to produce snowboards as well as skis. Most importantly, the production possibilities frontier clearly shows the tradeoff between healthcare and education. Suppose society has chosen to operate at point B, and it is considering producing more education. It had enjoyed seven years of dramatic growth and unprecedented prosperity. Suppose the first plant, Plant 1, can produce 200 pairs of skis per month when it produces only skis. The opportunity cost of skis at Plant 2 is 1 snowboard per pair of skis. The Production Possibilities Frontier, Part 1 The Economic Lowdown Video Series. This situation is illustrated by the production possibilities frontier in this graph. The plant with the lowest opportunity cost of producing snowboards is Plant 3; its slope of 0.5 means that Ms. Ryder must give up half a pair of skis in that plant to produce an additional snowboard. There are no specific numbers because we do not know the exact amount of resources this imaginary economy has, nor do we know how many resources it takes to produce healthcare and how many resources it takes to produce education. Alpine thus gives up fewer skis when it produces snowboards in Plant 3. However, the opportunity cost lost to health will be fairly large, and thus the slope of the PPF between D and F is steep, showing a large drop in health for only a small gain in education. Alpine Sports can thus produce 350 pairs of skis per month if it devotes its resources exclusively to ski production. 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. Direct link to Al's post 1. If however it had devoted all of its resources to producing sugar cane instead, it would be producing a much larger amount than the U.S., at point B. At its most basic, allocative efficiency means producers supply the quantity of each product that consumers demand. If the society were to allocate all of its resources to healthcare, it could produce at point A. The firm then starts producing snowboards. On this graph, the y-axis is Healthcare, and the x-axis is Education.. Theres another way to think about this. Now suppose the firm decides to produce 100 snowboards. Combination A involves devoting the plant entirely to ski production; combination C means shifting all of the plants resources to snowboard production; combination B involves the production of both goods. Countries tend to have different opportunity costs of producing a specific good, either because of different climates, geography, technology, or skills. Plant 3, though, is the least efficient of the three in 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. The reason for the shape of the Production Possibilities Curve (PPC) is something called the law of increasing opportunity costs. Suppose that Alpine Sports is producing 100 snowboards and 150 pairs of skis at point B. There are two major differences between a budget constraint and a production possibilities frontier.
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