Because the PPF is downward sloping from left to right, the only way society can obtain more education is by giving up some healthcare. 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. Health care is shown on the vertical (or y) axis, and education is shown on the horizontal (or x) axis. In effect, the production possibilities frontier plays the same role for society as the budget constraint plays for Alphonso. Understand specialization and its relationship to the production possibilities model and 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. 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. A production possibilities curve is a graphical representation of the alternative combinations of goods and services an economy can produce. 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. Society can choose any combination of the two goods on or inside the PPF. She also modified the first plant so that it could produce both snowboards and skis. People are having cosmetic surgery on every part of their bodies, but no high school or college education exists. We see in Figure 2.5 The Combined Production Possibilities Curve for Alpine Sports that, beginning at point A and producing only skis, Alpine Sports experiences higher and higher opportunity costs as it produces more snowboards. As it does, the production possibilities frontier for a society will tend to shift outward and society will be able to afford more of all goods. The slope of the PPF indicates the opportunity cost of producing one good versus the other good, and the opportunity cost can be compared to the opportunity costs of another producer to determine comparative advantage. Countries differences in comparative advantage determine which goods they will choose to produce and trade. 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. d. an upward-sloping straight line. First, the economy might fail to use fully the resources available to it. To see this relationship more clearly, examine Figure 2.3 The Slope of a Production Possibilities Curve. 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. Society can choose any combination of the two goods on or inside the PPF, but it doesnthave enough resources to produce outside the PPF. Suppose that, as before, Alpine Sports has been producing only skis. That is the tradeoff society faces. Whether or not we have specific numbers, conceptually we can measure the opportunity cost of additional education as society moves from point B to point C on the PPF. An economy that fails to make full and efficient use of its factors of production will operate inside its production possibilities curve. 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. Points on the production possibilities curve thus satisfy two conditions: the economy is making full use of its factors of production, and it is making efficient use of its factors of production. Explain, in your own words, why the production possibilities frontier (PPF) is a downward-sloping curve. If there is always a three-for-one tradeoff between goods X and Y, then the PPF between X and Y is a. a downward-sloping curve that is bowed outward. How many calculators will it be able to produce? 2. it, Posted 2 years ago. Conversely, the U.S. can produce large amounts of wheat per acre, but not much sugar cane. The reason for these straight lines was that the slope of the budget constraint was determined by the relative prices of the two goods in the. Further, the economy must make full use of its factors of production if it is to produce the goods and services it is capable of producing. Society can choose any combination of the two goods on or inside the PPF. In this section, we shall assume that the economy operates on its production possibilities curve so that an increase in the production of one good in the model implies a reduction in the production of the other. At A all resources go to healthcare and at B, most go to healthcare. 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. (i) Why is PP curve downward sloping from left to right? (D 2006C) (ii 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. Why is the production possibilities curve bowed out in shape? In radios? The curvature of the PPF is likely to differ by country, which results in different countries having comparative advantage in different goods. We assume that the factors of production and technology available to each of the plants operated by Alpine Sports are unchanged. Wouldn't allocative efficiency occur at the origin? 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. The U.S. has comparative advantage in wheat and Brazil has comparative advantage in sugar cane. To understand why the PPF is curved, start by considering point A at the top left-hand side of the PPF. 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. Opportunity cost is the trade-off that one makes when deciding between two options. The slope between points B and B is 2 pairs of skis/snowboard. Notice also that this curve has no numbers. 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, the slope of the PPF is relatively flat near the vertical-axis intercept. Only one of the productively efficient choices will be the allocatively efficient choice for society as a whole. At point A . 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. An economys factors of production are scarce; they cannot produce an unlimited quantity of goods and services. 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. At D most resources go to education, and at F, all go to education. PDF Microeconomics 12th Edition Arnold Test Bank Did you have an idea for improving this content? The production possibilities curves for the two plants are shown, along with the combined curve for both plants. Dec 2, 2022 OpenStax. 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. See full answer below. The slopes of the production possibilities curves for each plant differ. The reverse is also true; the U.S. has a lower opportunity cost of producing wheat than Brazil. Instead, it lays out the possibilities facing the economy. Suppose it considers moving from point B to point C. What would be the opportunity cost for the additional education? Except where otherwise noted, textbooks on this site In other words production of one good can be increased only after sacrificing some quantity of other good. This pattern is common enough that it has been given a name: the. As you read this section, focus on the similarities. then you must include on every digital page view the following attribution: Use the information below to generate a citation. A PPF w/Constant Opportunity Cost is a linear line, meaning the line is straight (not curved), and To be linear means the change between any two points anywhere on the line will be consistent. 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. The Production Possibilities Frontier, Part 1 The Economic Lowdown Video Series. Suppose a manufacturing firm is equipped to produce radios or calculators. 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. For society, there are many scarce resources. Why Production Possibility Frontier is useful? Because the PPF is downward sloping from left to right, the only way society can obtain more education is by giving up some healthcare. What is productive efficiency? (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. Where does the PPF come from? Also, a PPF is bows outward, which implies that there is an increasing opportunity cost of production. Direct link to Oubrae's post *My Review Question Answe, Posted 2 years ago. Airports around the world hired additional agents to inspect luggage and passengers. The Production Possibilities Frontier, Part 3 The Economic Lowdown Video Series. The result is the bowed-in curve ABCD. Opportunity cost. In this way, the law of increasing opportunity cost produces the outward-bending shape of the production possibilities frontier. Draw and explain what would happen to this market if an . Figure 2.9 Efficient Versus Inefficient Production illustrates the result. Suppose an economy fails to put all its factors of production to work. The curve is a downward-sloping straight line, indicating that there is a linear, negative relationship between the production of the two goods. Where will it produce them? When a country can produce a good at a lower opportunity cost than another country, we say that this country has a comparative advantage in that good. Direct link to vlad.guboy's post "Output mixes that had mo, Lesson 3: Production possibilities frontier. Because the PPF is downward sloping from left to right, the only way society can obtain more education is by giving up some healthcare. There are more similarities than differences, so for now focus on the similarities. Whats the difference between a budget constraint and a PPF? After all, thats not what they were trained for. In the book 'Principles of Microeconomics' where this article is taken from, budget constraints are discussed first then PPF. 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. Also, explain why all points inside of that curve represent inefficient outcomes. Factors of production (labor, capital, land) Is the PPF bowed or straight? A budget constraint shows the different combinations of goods and services a consumer can purchase with their fixed budget. Now consider the other end, at the lower right, of the production possibilities frontier. 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. A production possibilities frontier showing health care and education. 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. People work and use the income they earn to buyperhaps importgoods and services from people who have a comparative advantage in doing other things. What does the slope of the PPF measure? When can PPC be a straight line? 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. Now consider what would happen if Ms. Ryder decided to produce 1 more snowboard per month. 2.2 The Production Possibilities Frontier and Social Choices Suppose Plant 1 is producing 100 pairs of skis and 50 snowboards per month at point B. In our example, all three plants are equally good at snowboard production. At point A, all available resources (i.e. In drawing production possibilities curves for the economy, we shall generally assume they are smooth and bowed out, as in Panel (b). The slope of the PPF at a given point is the amount of good 'A' that would have to be sacrificed to get an additional unit of good 'B" That is the opportunity cost of getting an extra unit of good . Economists use a modelcalled the production possibilities frontier (PPF) to explain the constraints society faces in deciding what to produce. As a conceptual model, it simplifies. Producing more snowboards requires shifting resources out of ski production and thus producing fewer skis. Suppose it considers moving from point B to point C. What would the opportunity cost be for the additional education? We recommend using a The reverse is also true: the U.S. has a lower opportunity cost of producing wheat than Brazil. The gains to education from adding these last few resources to education are very small. What if on the horizontal axis of the PPF we plotted cigarettes, cocaine, opium and other drugs while on the vertical axis we plotted nuclear bombs or some other undesirable product? Two years later she added a third plant in another town. View Answer. . In the summer of 1929, however, things started going wrong. 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, Plant 1 can produce 200 pairs of skis per month, Plant 2 can produce 100 pairs of skis at per month, and Plant 3 can produce 50 pairs. To understand why the PPF is curved, start by considering point A at the top left-hand side of the PPF. Plant 3, though, is the least efficient of the three in ski production. The U.S. economy looked very healthy in the beginning of 1929. The law also applies as the firm shifts from snowboards to skis. . If Alpine Sports were to produce still more snowboards in a single month, it would shift production to Plant 2, the facility with the next-lowest opportunity cost. Become a member. Why does a PPF curve have to slope downward? 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. 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. The production possibilities frontier is downward sloping: producing more of one good requires producing less of others. Bowed when -factors of production are heterogeneous (Some laborers are better at one thing than the other) OR Law of Increasing Opportunity Cost - Study.com To shift from B to B, Alpine Sports must give up two more pairs of skis per snowboard. 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. For example, children are seeing a doctor every day, whether they are sick or not, but not attending school. Conversely, the opportunity cost of sugar cane is lower in Brazil. A PPF is more likely to be a downward-sloping curve that is bowed outward than a downward-sloping straight line because most resources are. Most importantly, the production possibilities frontier clearly shows the tradeoff between healthcare and education. In image (b), the U.S.s Sugar Cane production is nearly half the production of its wheat. 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. 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. Figure 2.9 Efficient Versus Inefficient Production. The example of choosing between catching rabbits and gathering berries illustrates how opportunity cost works. It has an advantage not because it can produce more snowboards than the other plants (all the plants in this example are capable of producing up to 100 snowboards per month) but because it is the least productive plant for making skis. It has two plants, Plant R and Plant S, at which it can produce these goods. Suppose a society desires two products: health care and education. Its land is devoted largely to nonagricultural use. Suppose a society allocated all of its resources to producing health care. Clearly not. Comparative advantage is not the same as absolute advantage, which is when a country can produce more of a good. 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. Imagine that society starts at choice D, which is devoting nearly all resources to education and very few to healthcare, and moves to point F, which is devoting all spending to education and none to healthcare. The Production Possibilities Frontier and Social Choices. 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. Why does the PPF have a different shape? A production possibilities frontiershows the possiblecombinations of goods and services that a society can produce with its limited resources. Plant 3 has a comparative advantage in snowboard production because it is the plant for which the opportunity cost of additional snowboards is lowest. A PPF curve is downward sloping, that is, it shows a negative relationship between the goods. But it would not have any resources to produce education. Specialization implies that an economy is producing the goods and services in which it has a comparative advantage. 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.