People work and use the income they earn to buy—perhaps import—goods and services from people who have a comparative advantage in doing other things. Figure 2.9 Efficient Versus Inefficient Production. This article covers, 1. Production had plummeted by almost 30%. The slope of Plant 1’s production possibilities curve measures the rate at which Alpine Sports must give up ski production to produce additional snowboards. Such specialization is typical in an economic system. The exhibit gives the slopes of the production possibilities curves for each of the firm’s three plants. The decision to devote more resources to security and less to other goods and services represents the choice we discussed in the chapter introduction. The negative slope of the production possibilities curve reflects the scarcity of the plant’s capital and labor. Which one will it choose to shift? It is hard to imagine that most of us could even survive in such a setting. The production possibility curve is the graphical illustration of the different combinations of two goods that the economy could make with all its resources being utilized. Leftward shift of PPF shows the decrease in resources or degradation of technology in the economy. The next 100 pairs of skis would be produced at Plant 2, where snowboard production would fall by 100 snowboards per month. Suppose Alpine Sports operates the three plants we examined in Figure 2.4 “Production Possibilities at Three Plants”. Specialization implies that an economy is producing the goods and services in which it has a comparative advantage. Where will it produce the calculators? The economy had moved well within its production possibilities curve. 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. 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 segment of the curve around point B is magnified in Figure 2.3 “The Slope of a Production Possibilities Curve”. This model graphically represents a hypothetical situation of how to make a choice between two goods. How many calculators will it be able to produce? Producing more snowboards requires shifting resources out of ski production and thus producing fewer skis. It illustrates the production possibilities model. In Panel (a) we have a combined production possibilities curve for Alpine Sports, assuming that it now has 10 plants producing skis and snowboards. In either case, production within the production possibilities curve implies the economy could improve its performance. 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. A. an advance in technology B. an increase in the labor force C. an increase in the capital stock D. a reduction in unemployment . Does the production take place only on PP Curve? Suppose Alpine Sports expands to 10 plants, each with a linear production possibilities curve. Now consider what would happen if Ms. Ryder decided to produce 1 more snowboard per month. The points from A to F in the above diagram shows this. Economic growth. Now suppose the firm decides to produce 100 snowboards. 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. Scarcity implies that a production possibilities curve is downward sloping; the law of increasing opportunity cost implies that it will be bowed out, or concave, in shape. B. That would bring ski production to 300 pairs, at point B. 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). While even smaller than the second plant, the third was primarily designed for snowboard production but could also produce skis. It is not necessary that the production takes place only on the PP Curve. One, of course, was increased defense spending. See instructions, Analysis of Financial Statements-Video Lectures. 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. Now draw the combined curves for the two plants. True This is a correct answer _____ Question 2 (Worth 5 points) The four factors of production are land, labor, capital, and government services. Suppose the first plant, Plant 1, can produce 200 pairs of skis per month when it produces only skis. 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). Putting its factors of production to work allows a move to the production possibilities curve, to a point such as A. We shall examine the significance of the bowed-out shape of the curve in the next section. Figure 2.3 The Slope of a Production Possibilities Curve. The greater the absolute value of the slope of the production possibilities curve, the greater the opportunity cost will be. 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”. Alpine thus gives up fewer skis when it produces snowboards in Plant 3. These are also illustrated with a production possibilities curve. We would say that Plant 1 has a comparative advantage in ski production. A production possibility frontier (PPF) illustrates the combinations of output of two products that a country can supply using all of their available factor inputs in an efficient way. Plant 3, though, is the least efficient of the three in ski production. Between points A and B, for example, the slope equals −2 pairs of skis/snowboard (equals −100 pairs of skis/50 snowboards). As we combine the production possibilities curves for more and more units, the curve becomes smoother. The gains we achieve through specialization are enormous. Economy are more efficient through competition. On production possibility curve P’P’, the economy can produce more goods than on curve PP. Airports around the world hired additional agents to inspect luggage and passengers. 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. Chapter 1: Economics: The Study of Choice, Chapter 2: Confronting Scarcity: Choices in Production, 2.3 Applications of the Production Possibilities Model, Chapter 4: Applications of Demand and Supply, 4.2 Government Intervention in Market Prices: Price Floors and Price Ceilings, Chapter 5: Elasticity: A Measure of Response, 5.2 Responsiveness of Demand to Other Factors, Chapter 6: Markets, Maximizers, and Efficiency, Chapter 7: The Analysis of Consumer Choice, 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, Chapter 9: Competitive Markets for Goods and Services, 9.2 Output Determination in the Short Run, Chapter 11: The World of Imperfect Competition, 11.1 Monopolistic Competition: Competition Among Many, 11.2 Oligopoly: Competition Among the Few, 11.3 Extensions of Imperfect Competition: Advertising and Price Discrimination, 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, 14.1 Price-Setting Buyers: The Case of Monopsony, Chapter 15: Public Finance and Public Choice, 15.1 The Role of Government in a Market Economy, Chapter 16: Antitrust Policy and Business Regulation, 16.1 Antitrust Laws and Their Interpretation, 16.2 Antitrust and Competitiveness in a Global Economy, 16.3 Regulation: Protecting People from the Market, Chapter 18: The Economics of the Environment, 18.1 Maximizing the Net Benefits of Pollution, Chapter 19: Inequality, Poverty, and Discrimination, Chapter 20: Macroeconomics: The Big Picture, 20.1 Growth of Real GDP and Business Cycles, Chapter 21: Measuring Total Output and Income, Chapter 22: Aggregate Demand and Aggregate Supply, 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, Chapter 24: The Nature and Creation of Money, 24.2 The Banking System and Money Creation, Chapter 25: Financial Markets and the Economy, 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, Chapter 28: Consumption and the Aggregate Expenditures Model, 28.1 Determining the Level of Consumption, 28.3 Aggregate Expenditures and Aggregate Demand, Chapter 29: Investment and Economic Activity, Chapter 30: Net Exports and International Finance, 30.1 The International Sector: An Introduction, 31.2 Explaining Inflation–Unemployment Relationships, 31.3 Inflation and Unemployment in the Long Run, Chapter 32: A Brief History of Macroeconomic Thought and Policy, 32.1 The Great Depression and Keynesian Economics, 32.2 Keynesian Economics in the 1960s and 1970s, 32.3. Where will it produce them? Would you be able to consume what you consume now? Production and employment fell. In Plant 2, she must give up one pair of skis to gain one more snowboard. In the wake of the 9/11 attacks in 2001, nations throughout the world increased their spending for national security. These values are plotted in a production possibilities curve for Plant 1. A production possibility curve even shows the basic economic problem of a country having limited resources, facing ... An outward shift of the production possibilities frontier is only possible if the country discovers new resources or there is an improvement in technological development. Figure 2.4 “Production Possibilities at Three Plants” shows production possibilities curves for each of the firm’s three plants. An outward shift of PPC means the increase in productive capacity, ie. The combined production possibilities curve for the firm’s three plants is shown in Figure 2.5 “The Combined Production Possibilities Curve for Alpine Sports”. The production possibilities curve is bow-shaped precisely because there reaches a critical point at which the produciton of less guns means the possibility for more butter, and vice versa. These resources were not put back to work fully until 1942, after the U.S. entry into World War II demanded mobilization of the economy’s factors of production. Much of the land in the United States has a comparative advantage in agricultural production and is devoted to that activity. Economics Mcqs for test Preparation from Basic to Advance. This production possibilities curve shows an economy that produces only skis and snowboards. Economists conclude that it is better to be on the production possibilities curve than inside it. The production of both goods rises. Instead, it lays out the possibilities facing the economy. Production on the production possibilities curve ABCD requires that factors of production be transferred according to comparative advantage. In radios? 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. Please share your supplementary material! 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. That was a loss, measured in today’s dollars, of well over $3 trillion. Plants 2 and 3, if devoted exclusively to ski production, can produce 100 and 50 pairs of skis per month, respectively. Points within the curve show when a country’s resources are not being fully utilised This is a result of transferring resources from the production of one good to another according to comparative advantage. In material terms, the forgone output represented a greater cost than the United States would ultimately spend in World War II. Explain the concept of the production possibilities curve and understand the implications of its downward slope and bowed-out shape. Production Possibilities. The Production possibility curve will shift under following two condition: (a) change in resources, (b) Change in technology of production for both the goods. The economy produces SA units of security and OA units of all other goods and services per period. In the summer of 1929, however, things started going wrong. 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. The opportunity cost of an additional snowboard at each plant equals the absolute values of these slopes (that is, the number of pairs of skis that must be given up per snowboard). 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. It helpz to make notes of class 11, Copyright © 2021 LEARNINCOMMERCE - WordPress Theme : By Offshore Themes, Sorry, you have Javascript Disabled! 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. When devoted solely to snowboards, it produces 100 snowboards per month. She added a second plant in a nearby town. Instead of the bowed-out production possibilities curve ABCD, we get a bowed-in curve, AB′C′D. We may conclude that, as the economy moved along this curve in the direction of greater production of security, the opportunity cost of the additional security began to increase. This curve depicts an entire economy that produces only skis and snowboards. Between 1929 and 1942, the economy produced 25% fewer goods and services than it would have if its resources had been fully employed. Since resources are scarce, deciding about what to produce is of pivotal importance for individuals, firms, governments and whole economies. We can use the production possibilities model to examine choices in the production of goods and services. Driven by private … Which of the following will not shift a country’s production possibilities frontier outward ? The absolute value of the slope of any production possibilities curve equals the opportunity cost of an additional unit of the good on the horizontal axis. We often think of the loss of jobs in terms of the workers; they have lost a chance to work and to earn income. Concepts covered include efficiency, inefficiency, economic growth and contraction, and recession. (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. Such an allocation implies that the law of increasing opportunity cost will hold. Because an economy’s 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. Production Possibility Frontiers (Curves, Boundaries) – The Basics A production possibility frontier (PPF) shows the maximum amount of goods and services which an economy can produce with its existing resources at existing factor productivity. The attempt to provide it requires resources; it is in that sense that we shall speak of the economy as “producing” security. Thus, the production possibilities curve not only shows what can be produced; it provides insight into how goods and services should be produced. When an economy is in a recession, it is operating inside the PPC. Top Answer . 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 there are idle or inefficiently allocated factors of production, the economy will operate inside the production possibilities curve. Figure 2.8 “Idle Factors and Production” shows an economy that can produce food and clothing. Economic growth is shown by a shift of the production possibilities curve outward and to the right. Producing a snowboard in Plant 3 requires giving up just half a pair of skis. The table in Figure 2.2 “A Production Possibilities Curve” gives three combinations of skis and snowboards that Plant 1 can produce each month. Local and state governments also increased spending in an effort to prevent terrorist attacks. To construct a production possibilities curve, we will begin with the case of a hypothetical firm, Alpine Sports, Inc., a specialized sports equipment manufacturer. The steeper the curve, the greater the opportunity cost of an additional snowboard. 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. The production possibility frontier will shift outward when there is and increase in the productive resources. 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. The increase in resources devoted to security meant fewer “other goods and services” could be produced. We can think of each of Ms. Ryder’s three plants as a miniature economy and analyze them using the production possibilities model. The production possibilities model does not tell us where on the curve a particular economy will operate. We begin at point A, with all three plants producing only skis. We assume that the factors of production and technology available to each of the plants operated by Alpine Sports are unchanged. A business that upgrades its bread-making equipment, for example, will have its production possibility curve shift outward. Plant 3 would be the last plant converted to ski production. Production Possibility curve (PPC) shows the maximum combinations of goods and services that can be produced by an economy in a given time period with its limited resources. 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”. A movement from A to B requires shifting resources out of the production of all other goods and services and into spending on security. Inefficient production implies that the economy could be producing more goods without using any additional labor, capital, or natural resources. This is a result of transferring resources from the production of one good to another according to comparative advantage. factors of production).. Suppose an economy fails to put all its factors of production to work. MARGINAL OPPORTUNITY COST: MOC of a particular good along PPC is the amount of other good which is sacrificed for production of additional unit of another good. 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. In the graph, if all the resources are used to produce Schools then there will be no Hospitals. Production possibility curve shows the different combinations of the production of two commodities that can be achieved in an economy given the resources and technology which are to be fully utilized. 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. Suppose that Alpine Sports is producing 100 snowboards and 150 pairs of skis at point B′. Figure 2.6 Production Possibilities for the Economy. 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