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. The negative slope of the production possibilities curve reflects the scarcity of the plants capital and labor. It retains its negative slope and bowed-out shape. In the graph, healthcare is shown on the vertical axis and education is shown on the horizontal axis. A production possibilities frontiershows the possiblecombinations of goods and services that a society can produce with its limited resources. This implies as the production of one good increases, the quantity produced of the other good decreases. Just as individuals cannot have everything they want and must instead make choices, society as a whole cannot haveeverything it might want, either. In other words, the products are limited because the resources are limited. With all three plants producing only snowboards, the firm is at point D on the combined production possibilities curve, producing 300 snowboards per month and no skis. 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. The firm then starts producing snowboards. A production possibilities frontier showing health care and education. Society can choose any combination of the two goods on or inside the PPF. Economists say that an economy has a comparative advantage in producing a good or service if the opportunity cost of producing that good or service is lower for that economy than for any other. Direct link to Louis Lepper's post I don't get the answer to, Posted 3 years ago. This is the opportunity cost of the additional education. And when they move, the society doesnt lose much healthcare, because the teachers werent very good at that. Point R on the graph represents the good that drops in quantity as a result of greater efficiency in producing other goods. That's the trade-off this society faces. Second, it might not allocate resources on the basis of comparative advantage. Figure 2. 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? 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. Understand the difference between comparative advantage and . consent of Rice University. In the wake of the 9/11 attacks in 2001, nations throughout the world increased their spending for national security. Where will it produce the calculators? Much of the land in the United States has a comparative advantage in agricultural production and is devoted to that activity. Producing a snowboard in Plant 3 requires giving up just half a pair of skis. What happen if society wants less products than what are on the productive efficiency point? View history. That is because the resources transferred from the production of other goods and services to the production of security had a greater and greater comparative advantage in producing things other than security. In microeconomics, a production-possibility frontier ( PPF ), production possibility curve ( PPC ), or production possibility boundary ( PPB) is a graphical representation showing all the possible options of output for two goods that can be produced using all factors of production, where the given resources are fully and . Thus, the production possibilities curve not only shows what can be produced; it provides insight into how goods and services should be produced. When devoted solely to snowboards, it produces 100 snowboards per month. Suppose a society desires two products: health care and education. 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. One can easily see this with a simple observation of the extreme production points in the PPFs of the two countries. Take another look at the production possibilities frontier in this video about the imaginary Econ Isle.. Why is the PPF downward sloping? When an economy is operating on its production possibilities curve, we say that it is engaging in efficient production. In an actual economy, with a tremendous number of firms and workers, it is easy to see that the production possibilities curve will be smooth. 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 PPF is downward sloping because it depicts the trade-off between two products. Figure 2.8 Idle Factors and Production shows an economy that can produce food and clothing. Also, explain why all points inside of that curve represent inefficient outcomes. Characteristics of PPF: The two basic characteristics or features of PPF are: 1. But it would not have any resources to produce education. Would you be able to consume what you consume now? Figure 2.3 shows healthcare on the vertical axis and education on the horizontal axis. Here they are, the 100 best restaurants in New York City, ranked. 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. These resources were not put back to work fully until 1942, after the U.S. entry into World War II demanded mobilization of the economys factors of production. 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. In drawing the production possibilities curve, we shall assume that the economy can produce only two goods and that the quantities of factors of production and the technology available to the economy are fixed. This happens because some resources are better suited for producing certain goods and services instead of others. At point A . The next 100 pairs of skis would be produced at Plant 2, where snowboard production would fall by 100 snowboards per month. By the end of this section, you will be able to: Just as individuals cannot have everything they want and must instead make choices, society as a whole cannot have everything it might want, either. Productive efficiency means that, given the available inputs and technology, it is impossible to produce more of one good without decreasing the quantity that is produced of another good. Just as individuals cannot have everything they want and must instead make choices, society as a whole cannot have everything it might want, either. If we started at the other end of the PPF at point F and moved to point D, we would be moving doctors from teaching to healthcare with the result that the gain in healthcare would be large while the loss in education would be small (the same logic we used above). Local and state governments also increased spending in an effort to prevent terrorist attacks. Why is allocative inefficiency also wasteful? Every economy faces two situations in which it may be able to expand consumption of all goods. Alpine thus gives up fewer skis when it produces snowboards in Plant 3. What type of resources are going to move to producing education? At A all resources go to healthcare and at B, most go to healthcare. In Plant 2, she must give up one pair of skis to gain one more snowboard. budget line) will be constant, but when there is more than one scarce resources, the trade-off will be increasingly costly (e.g. At point A, all available resources are devoted to healthcare and no resources are left for education. 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. . That would bring ski production to 300 pairs, at point B. The production possibilities frontier can illustrate two kinds of efficiency: productive efficiency and allocative efficiency. Could an economy that is using all its factors of production still produce less than it could? Direct link to Martin's post What is a budget constrai, Posted 3 years ago. 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. Even though each of the plants has a linear curve, combining them according to comparative advantage, as we did with 3 plants in Figure 2.5 The Combined Production Possibilities Curve for Alpine Sports, produces what appears to be a smooth, nonlinear curve, even though it is made up of linear segments. Where will it produce them? In the second case, as resources grow over a period of years (e.g., more labor and more capital), the economy grows. all the doctors and all the teachers) are devoted to providinghealth care and none isleft for education. Plant 3s comparative advantage in snowboard production makes a crucial point about the nature of comparative advantage. The following graph illustrates these ideas using a production possibilities frontier between healthcare and education. To understand why the PPF is curved, start by considering point A at the top left-hand side of the PPF. 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. The reason for these straight lines was that the relative prices of the two goods in the consumption budget constraint determined the slope of the budget constraint. Such an allocation implies that the law of increasing opportunity cost will hold. More generally, as society produces more and more of some good or service, the cost of production grows larger and larger relative to the cost of producing other goods or services. We recommend using a Of course, an economy cannot really produce security; it can only attempt to provide it. 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. Say the doctors are practicing medicine and the teachers are helping out as best they can. Here, the opportunity cost is lowest at Plant 3 and greatest at Plant 1. 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. The reverse is also true: the U.S. has a lower opportunity cost of producing wheat than Brazil. we learned that every society faces the problem of scarcity, where limited resources conflict with unlimited needs and wants. Producing more skis requires shifting resources out of snowboard production and thus producing fewer snowboards. While individuals face budget and time constraints, societies face the constraint of limited resources (e.g. How do you define and measure opportunity cost using the PPF model? Were now readyto address the differences between societys PPF and an individuals budget constraint. The second major difference is the absence of specific numbers on the axes of the PPF. Suppose two countries, the US and Brazil, need to decide how much they will produce of two crops: sugar cane and wheat. Direct link to Andrea Burgio's post I dont know if i'm missin, Posted 2 years ago. In the real world, of course, we have more than two goods and services, and we have more resources than just labor, but the general rule still holds. An economy cannot operate on its production possibilities curve unless it has full employment. We can think of this as the opportunity cost of producing an additional snowboard at Plant 1. Suppose two countries, the US and Brazil, need to decide how much they will produce of two crops: sugar cane and wheat. Could it still operate inside its production possibilities curve? a. Use the production possibilities model to distinguish between full employment and situations of idle factors of production and between efficient and inefficient production. If it fails to do that, it will operate inside the curve. Theres another way to think about this. At point A, all available resources (i.e. No matter how many of each good or service a consumer buys, the prices stay the same. Suppose Alpine Sports operates the three plants we examined in Figure 2.4 Production Possibilities at Three Plants. Should the government promote the product or what? Two years later she added a third plant in another town. Now imagine that some of these resources are diverted from health care to education, so that the economy is at point B instead of point A. One, of course, was increased defense spending. At A all resources go to healthcare and at B, most go to healthcare. Some workers are without jobs, some buildings are without occupants, some fields are without crops. 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. Workers, for example, specialize in particular fields in which they have a comparative advantage. If the society were to allocate all of its resources to healthcare, it could produce at point A. Christie Ryder began the business 15 years ago with a single ski production facility near Killington ski resort in central Vermont. Output began to grow after 1933, but the economy continued to have vast numbers of idle workers, idle factories, and idle farms. d. used to produce consumption goods. The combined production possibilities curve for the firms three plants is shown in Figure 2.5 The Combined Production Possibilities Curve for Alpine Sports. Demands may be incongruent to supply capabilities, and agents should account for that. 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 shape of the PPF is typically curved outward, rather than straight. 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. The decision to devote more resources to security and less to other goods and services represents the choice we discussed in the chapter introduction. This lawasserts that as additional increments of resources are devotedto a certain purpose, the marginal benefit from those additional increments will decline. Suppose a manufacturing firm is equipped to produce radios or calculators. Plant 3, though, is the least efficient of the three in ski production. The PPF graph is major simplification of the real world. Why is a production possibilities frontier typically drawn as a curve, rather than a straight line? 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. Because the PPF is downward sloping from left to right, the only way society can obtain more education is by giving up some health care. In the self-check questions, it is stated in the solution that both in consumers budget constraint and societys production possibilities frontier, the graph shows the opportunity cost graphically as the slope of the constraint (budget or PPF). The most important difference between the two graphs, though, is that a budget constraint is a straight line, while a production possibilities curve is typically bowed outwards, i.e. Suppose society has chosen to operate at point B, and its considering producing more education. Why Production Possibility Frontier is useful? The bowed-out curve of Figure 2.5 The Combined Production Possibilities Curve for Alpine Sports becomes smoother as we include more production facilities. Specialization implies that an economy is producing the goods and services in which it has a comparative advantage. Figure 1 (shown again). Figure 2.3 The Slope of a Production Possibilities Curve. But the amount of education gained is great, because thats what teachers are trained for. The increase in resources devoted to security meant fewer other goods and services could be produced. In other words, each resource is not worth the same at producing different products. What determines how far a PPF is from the origin. 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). Explain the concept of the production possibilities curve and understand the implications of its downward slope and bowed-out shape. In our example, all three plants are equally good at snowboard production. Why does a PPF curve have to slope downward? However, putting those marginal dollars into education, which is completely without resources at point A, can produce relatively large gains. At D most resources go to education, and at F, all go to 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. If the firm wishes to increase snowboard production, it will first use Plant 3, which has a comparative advantage in snowboards. This production possibilities curve shows an economy that produces only skis and snowboards. The example of choosing between catching rabbits and gathering berries illustrates how opportunity cost works. Production of all other goods and services falls by OA OB units per period. 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. The U.S. has comparative advantage in wheat and Brazil has comparative advantage in sugar cane. 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. 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. That was a loss, measured in todays dollars, of well over $3 trillion. Just because you can make a billion phones because it is along the PPF curve is not reasonable. 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. 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. The production possibilities model does not tell us where on the curve a particular economy will operate. This choice is shown in Figure 1 at point A. Although the production possibilities frontierthe PPFis a simple economic model, it's a great tool for illustrating some very important economic lessons: The frontier line illustrates scarcitybecause it shows the limits of how much can be produced with the given resources. It is the amount of the good on the vertical axis that must be given up in order to free up the resources required to produce one more unit of the good on the horizontal axis. An economy achieves a point on its production possibilities curve only if it allocates its factors of production on the basis of comparative advantage. This situation would be extreme and even ridiculous. They continued to fall for several years. .How would you define a production point that represent efficient versus inefficient use of the resources? 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). Such specialization is typical in an economic system. The exhibit gives the slopes of the production possibilities curves for each of the firms three plants. Do you remember Charliechoosing combinations of burgers and bus tickets within his budget constraint? 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. Suppose it considers moving from point B to point C. What would be the opportunity cost for the additional education? This situation is illustrated by the production possibilities frontier in Figure 1. In effect, the production possibilities frontier plays the same role for society as the budget constraint plays for Charlie. Thus, the slope of the PPF is relatively steep near the horizontal-axis intercept. However, improvements in productive efficiency take time to discover and implement, and economic growth happens only gradually. The study of economics does not presume to tell a society what choice it. c. relatively cheap at low levels of output. Thus, all choices along a given PPF like B, C, and D display productive efficiency, but R does not. The table shows the combinations of pairs of skis and snowboards that Plant 1 is capable of producing each month. In the section of the curve shown here, the slope can be calculated between points B and B. For society, there are many scarce resources. What is productive efficiency? Suppose it considers moving from point B to point C. . This pattern is common enough that it has been given a name: the. The curve is a downward-sloping straight line, indicating that there is a linear, negative relationship between the production of the two goods. If every trade-off were the same, it would create a straight line. People work and use the income they earn to buyperhaps importgoods and services from people who have a comparative advantage in doing other things. Notice that this production possibilities curve, which is made up of linear segments from each assembly plant, has a bowed-out shape; the absolute value of its slope increases as Alpine Sports produces more and more snowboards. OpenStax is part of Rice University, which is a 501(c)(3) nonprofit. Direct link to Joshua's post The PPF graph is major si, Posted 2 years ago. By now you might be saying, Hey, this PPF is sounding like the budget constraint. If so, read the following Clear It Up feature. 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. Wed love your input. 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. However, it would not have any resources to produce education. In the production possibilities framework, economic growth is depicted by the PPF Thus, the slope is different at various points on the PPF. For example, children are seeing a doctor every day, whether they are sick or not, but not attending school. For this reason, the shape of the PPF from A to B is relatively flat, representing a relatively small drop-off in health and a relatively large gain in 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. I'm pretty sure it wasn't mentioned in previous videos in this section.