The increase in resources devoted to security meant fewer other goods and services could be produced. c. a downward-sloping straight line. Could a nation be producing in a way that is allocatively efficient, but productively inefficient? Solution The production possibility curve is downward sloping from left to right because more of good X can be produced only with less production of good Y, when the given resources are assumed to be fully and efficiently utilised, using the given technology. For consumers, there is only one scarce resource: budget dollars. According to this law, with the fuller utilisation of the given resources, in order to produce an additional unit of one good, some of the resources are to be withdrawn from the production of another good. That will require shifting one of its plants out of ski production. It had enjoyed seven years of dramatic growth and unprecedented prosperity. 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. This situation would be extreme and even ridiculous. There are more similarities than differences between individual choice and social choice. The PPF is a graph showing all combinations of two goods that can be produced given the available resources. Now consider what would happen if Ms. Ryder decided to produce 1 more snowboard per month. In our simple example above, there were two different resources: doctors and teachers, and each resource is better at one job than at the other. The teachers, though, are good at education, and not very good at healthcare. As you read this section, you will see parallels between individual choice and societal choice. 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 lesson is not that society is likely to make an extreme choice like devoting no resources to education at point A or no resources to health at point F. Instead, the lesson is that the gains from committing additional marginal resources to education depend on how much is already being spent. The slope equals 2 pairs of skis/snowboard (that is, it must give up two pairs of skis to free up the resources necessary to produce one additional snowboard). To put this in terms of the production possibilities curve, Plant 3 has a comparative advantage in snowboard production (the good on the horizontal axis) because its production possibilities curve is the flattest of the three curves. Putting its factors of production to work allows a move to the production possibilities curve, to a point such as A. We begin at point A, with all three plants producing only skis. At D most resources go to education, and at F, all go to education. The segment of the curve around point B is magnified in Figure 2.3 The Slope of a Production Possibilities Curve. The production possibilities curves for the two plants are shown, along with the combined curve for both plants. b. The PPF graph is major simplification of the real world. Local and state governments also increased spending in an effort to prevent terrorist attacks. We assume that the factors of production and technology available to each of the plants operated by Alpine Sports are unchanged. Hong Kong, with its huge population and tiny endowment of land, allocates virtually none of its land to agricultural use; that option would be too costly. What type of resources are going to move to producing education? Sort by: Due to the limitation of resources and technology, if the economy. Thus, the slope is different at various points on the PPF. If the firm were to produce 100 snowboards at Plant 3, ski production would fall by 50 pairs per month (recall that the opportunity cost per snowboard at Plant 3 is half a pair of skis). Countries tend to have different opportunity costs of producing a specific good, either because of different climates, geography, technology or skills. Economists often use models such as the production possibilities model with graphs that show the general shapes of curves but that do not include specific numbers. Understand specialization and its relationship to the production possibilities model and comparative advantage. Direct link to Andrea Burgio's post I dont know if i'm missin, Posted 2 years ago. This section of the chapter will explain the constraints society faces, using a model called the production possibilities frontier (PPF). View history. Direct link to nishankpatil25's post How to use clear it up fe, Posted 3 years ago. 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. The lesson is not that society is likely to make an extreme choice like devoting no resources to education at point A or no resources to health at point F. Instead, the lesson is that the gains from committing additional marginal resources to education depend on how much is already being spent. Here, we have placed the number of pairs of skis produced per month on the vertical axis and the number of snowboards produced per month on the horizontal axis. An economy's production possibilities boundary is given by 45 = A + 5B, where A is the quantity of good A and B is the quantity of good B. In other words, the opportunity cost of education in terms of healthcare is low. This section of the chapter will explain the constraints faced by society, using a model called the. Conversely, the opportunity cost of sugar cane is lower in Brazil. Between points A and B, for example, the slope equals 2 pairs of skis/snowboard (equals 100 pairs of skis/50 snowboards). Because of this, the magnitude of the slope of the PPF increases, meaning the slope gets steeper, as we move down and to the right along the curve. In the second case, as resources grow over a period of years (e.g., more labor and more capital), the economy grows. Characteristics of PPF: The two basic characteristics or features of PPF are: 1. Conversely, the U.S. can produce a lot of wheat per acre, but not much sugar cane. 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. The opportunity cost would be the health care that society has to give up. The slope of the PPF gives the opportunity cost of producing an additional unit of wheat. Producing 1 additional snowboard at point B requires giving up 2 pairs of skis. First, the economy might fail to use fully the resources available to it. Airports around the world hired additional agents to inspect luggage and passengers. Diverting some resources away from A to B causes relatively little reduction in health because the last few marginal dollars going into healthcare services are not producing much additional gain in health. When you open your PPF Account you will get a pass-book which will be updated everytime you make a transaction. Direct link to Sage Taki's post In the self-check questio, Posted 2 years ago. I don't understand: if we don't raise amount of resourches for healtccare, why we reduce amount of resourches for education? An economy that is operating inside its production possibilities curve could, by moving onto it, produce more of all the goods and services that people value, such as food, housing, education, medical care, and music. The table shows the combinations of pairs of skis and snowboards that Plant 1 is capable of producing each month. Comparative advantage is not the same as absolute advantage, which is when a country can produce more of a good. As you read this section, focus on the similarities. Suppose there is an improvement in medical technology that enables more healthcare to be provided with the same amount of resources. we learned that every society faces the problem of scarcity, where limited resources conflict with unlimited needs and wants. a. better suited for the production of some goods than others. 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 2.4 Production Possibilities at Three Plants shows production possibilities curves for each of the firms three plants. At A all resources go to healthcare and at B, most go to healthcare. As a result of a failure to achieve full employment, the economy operates at a point such as B, producing FB units of food and CB units of clothing per period. 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. Over time, a growing economy will tend to shift the PPF outwards. 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. The opportunity cost of an additional snowboard at each plant equals the absolute values of these slopes. Explain why societies cannot make a choice above their production possibilities frontier and should not make a choice below it. Do you remember Charliechoosing combinations of burgers and bus tickets within his budget constraint? To shift from B to B, Alpine Sports must give up two more pairs of skis per snowboard. The gains we achieve through specialization are enormous. Explain, in your own words, why the production possibilities frontier (PPF) is a downward-sloping curve. The curve is a downward-sloping straight line, indicating that there is a linear, negative relationship between the production of the two goods. Suppose it considers moving from point B to point C. What would the opportunity cost be for the additional education? 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. Chapter 1: Economics: The Study of Choice, Chapter 2: Confronting Scarcity: Choices in Production, Chapter 4: Applications of Demand and Supply, Chapter 5: Elasticity: A Measure of Response, Chapter 6: Markets, Maximizers, and Efficiency, Chapter 7: The Analysis of Consumer Choice, Chapter 9: Competitive Markets for Goods and Services, Chapter 11: The World of Imperfect Competition, Chapter 12: Wages and Employment in Perfect Competition, Chapter 13: Interest Rates and the Markets for Capital and Natural Resources, Chapter 14: Imperfectly Competitive Markets for Factors of Production, Chapter 15: Public Finance and Public Choice, Chapter 16: Antitrust Policy and Business Regulation, Chapter 18: The Economics of the Environment, Chapter 19: Inequality, Poverty, and Discrimination, Chapter 20: Macroeconomics: The Big Picture, Chapter 21: Measuring Total Output and Income, Chapter 22: Aggregate Demand and Aggregate Supply, Chapter 24: The Nature and Creation of Money, Chapter 25: Financial Markets and the Economy, Chapter 28: Consumption and the Aggregate Expenditures Model, Chapter 29: Investment and Economic Activity, Chapter 30: Net Exports and International Finance, Chapter 32: A Brief History of Macroeconomic Thought and Policy, Chapter 34: Socialist Economies in Transition, Figure 2.2 A Production Possibilities Curve, Figure 2.3 The Slope of a Production Possibilities Curve, Figure 2.4 Production Possibilities at Three Plants, Figure 2.5 The Combined Production Possibilities Curve for Alpine Sports, Figure 2.6 Production Possibilities for the Economy, Figure 2.9 Efficient Versus Inefficient Production, Next: 2.3 Applications of the Production Possibilities Model, Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License. The shape of the PPF depends on whether there are increasing, decreasing, or constant costs. A PPF curve is downward sloping, that is, it shows a negative relationship between the goods. Health care is shown on the vertical (or y) axis, and education is shown on the horizontal (or x) axis. The law also applies as the firm shifts from snowboards to skis. The curve shown combines the production possibilities curves for each plant. Graphically, the rise is small and the run is large so the slope (which is the ratio of rise over run) is flat. Where will it produce them? Considering the situation in Figure 1 (shown again below), suppose we have only two types of resources: doctors and teachers. 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. Thus, a society must choose between tradeoffs in the present. Increasing the availability of these goods would improve the standard of living. Only one of the productively efficient choices will be the allocatively efficient choice for society as a whole. We have already seen that an additional snowboard requires giving up two pairs of skis in Plant 1. In effect, the production possibilities frontier plays the same role for society as the budget constraint plays for Charlie. Specialization means that an economy is producing the goods and services in which it has a comparative advantage. PPC is downward sloping because production of one item can be increased only after sacrificing some of the other good. This situation would be extreme and even ridiculous. How Economists Use Theories and Models to Understand Economic Issues, How To Organize Economies: An Overview of Economic Systems, Introduction to Choice in a World of Scarcity, How Individuals Make Choices Based on Their Budget Constraint, Confronting Objections to the Economic Approach, Demand, Supply, and Equilibrium in Markets for Goods and Services, Shifts in Demand and Supply for Goods and Services, Changes in Equilibrium Price and Quantity: The Four-Step Process, Introduction to Labor and Financial Markets, Demand and Supply at Work in Labor Markets, The Market System as an Efficient Mechanism for Information, Price Elasticity of Demand and Price Elasticity of Supply, Polar Cases of Elasticity and Constant Elasticity, How Changes in Income and Prices Affect Consumption Choices, Behavioral Economics: An Alternative Framework for Consumer Choice, Production, Costs, and Industry Structure, Introduction to Production, Costs, and Industry Structure, Explicit and Implicit Costs, and Accounting and Economic Profit, How Perfectly Competitive Firms Make Output Decisions, Efficiency in Perfectly Competitive Markets, How a Profit-Maximizing Monopoly Chooses Output and Price, Introduction to Monopolistic Competition and Oligopoly, Introduction to Monopoly and Antitrust Policy, Environmental Protection and Negative Externalities, Introduction to Environmental Protection and Negative Externalities, The Benefits and Costs of U.S. Environmental Laws, The Tradeoff between Economic Output and Environmental Protection, Introduction to Positive Externalities and Public Goods, Wages and Employment in an Imperfectly Competitive Labor Market, Market Power on the Supply Side of Labor Markets: Unions, Introduction to Poverty and Economic Inequality, Income Inequality: Measurement and Causes, Government Policies to Reduce Income Inequality, Introduction to Information, Risk, and Insurance, The Problem of Imperfect Information and Asymmetric Information, Voter Participation and Costs of Elections, Flaws in the Democratic System of Government, Introduction to the Macroeconomic Perspective, Measuring the Size of the Economy: Gross Domestic Product, How Well GDP Measures the Well-Being of Society, The Relatively Recent Arrival of Economic Growth, How Economists Define and Compute Unemployment Rate, What Causes Changes in Unemployment over the Short Run, What Causes Changes in Unemployment over the Long Run, How to Measure Changes in the Cost of Living, How the U.S. and Other Countries Experience Inflation, The International Trade and Capital Flows, Introduction to the International Trade and Capital Flows, Trade Balances in Historical and International Context, Trade Balances and Flows of Financial Capital, The National Saving and Investment Identity, The Pros and Cons of Trade Deficits and Surpluses, The Difference between Level of Trade and the Trade Balance, The Aggregate Demand/Aggregate Supply Model, Introduction to the Aggregate SupplyAggregate Demand Model, Macroeconomic Perspectives on Demand and Supply, Building a Model of Aggregate Demand and Aggregate Supply, How the AD/AS Model Incorporates Growth, Unemployment, and Inflation, Keynes Law and Says Law in the AD/AS Model, Introduction to the Keynesian Perspective, The Building Blocks of Keynesian Analysis, The Keynesian Perspective on Market Forces, Introduction to the Neoclassical Perspective, The Building Blocks of Neoclassical Analysis, The Policy Implications of the Neoclassical Perspective, Balancing Keynesian and Neoclassical Models, Introduction to Monetary Policy and Bank Regulation, The Federal Reserve Banking System and Central Banks, How a Central Bank Executes Monetary Policy, Exchange Rates and International Capital Flows, Introduction to Exchange Rates and International Capital Flows, Demand and Supply Shifts in Foreign Exchange Markets, Introduction to Government Budgets and Fiscal Policy, Using Fiscal Policy to Fight Recession, Unemployment, and Inflation, Practical Problems with Discretionary Fiscal Policy, Introduction to the Impacts of Government Borrowing, How Government Borrowing Affects Investment and the Trade Balance, How Government Borrowing Affects Private Saving, Fiscal Policy, Investment, and Economic Growth, Introduction to Macroeconomic Policy around the World, The Diversity of Countries and Economies across the World, Improving Countries Standards of Living, Causes of Inflation in Various Countries and Regions, What Happens When a Country Has an Absolute Advantage in All Goods, Intra-industry Trade between Similar Economies, The Benefits of Reducing Barriers to International Trade, Introduction to Globalization and Protectionism, Protectionism: An Indirect Subsidy from Consumers to Producers, International Trade and Its Effects on Jobs, Wages, and Working Conditions, Arguments in Support of Restricting Imports, How Governments Enact Trade Policy: Globally, Regionally, and Nationally, The Use of Mathematics in Principles of Economics, A Healthcare vs. Education Production Possibilities Frontier.
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