When factors of production are allocated on a basis other than comparative advantage, the result is inefficient production. We can think of each of Ms. Ryders three plants as a miniature economy and analyze them using the production possibilities model. All choices along a production possibilities frontier display productive efficiency; that is, it is impossible to use societys resources to produce more of one good without decreasing production of the other good. Draw and explain what would happen to this market if an . 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. Lets dig into this. This situation would be extreme and even ridiculous. Suppose it considers moving from point B to point C. What would be the opportunity cost for the additional education? 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. By contrast, the slope of a PPF is the cost to society of producing one good or service relative to the other good or service. Figure 2.3 The Slope of a Production Possibilities Curve. Most importantly, the production possibilities frontier clearly shows the tradeoff between healthcare and education. 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. 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. When society reallocates resources from one product to another, the relative costs change, which means the slope of the PPF does also. In drawing production possibilities curves for the economy, we shall generally assume they are smooth and bowed out, as in Panel (b). In this way, the law of increasing opportunity cost produces the outward-bending shape of the production possibilities frontier. A production possibilities frontier showing health care and education. Output mixes that had more healthcare (and less education) would have a steeper ray, while those with more education (and less healthcare) would have a flatter ray. 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. 18. Direct link to Sree Vishal's post Note the word *improvemen, Posted 4 years ago. In other words, the opportunity cost of education in terms of healthcare is low. Now suppose the firm decides to produce 100 snowboards. hover over link. It also suffered many human casualties, both soldiers and civilians. The economy produces SA units of security and OA units of all other goods and services per period. Want to cite, share, or modify this book? Figure 1. Ski sales grew, and she also saw demand for snowboards risingparticularly after snowboard competition events were included in the 2002 Winter Olympics in Salt Lake City. budget line) will be constant, but when there is more than one scarce resources, the trade-off will be increasingly costly (e.g. If it were to allocate all of its resources to education, it could produce at point F. Alternatively, the society could choose to produce any combination of healthcare and education shown on the production possibilities frontier. Clearly not. (Scarcity principle) The slope of the PPC measures all possible combinations of two goods, which an economy can produce with available resources. A concave curve is one that bends outward from the origin. Figure 2.9 Efficient Versus Inefficient Production. 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). (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. The reverse is also true: the U.S. has a lower opportunity cost of producing wheat than Brazil. As we include more and more production units, the curve will become smoother and smoother. Many countries, for example, chose to move along their respective production possibilities curves to produce more security and national defense and less of all other goods in the wake of 9/11. But additional increases after that typically causerelatively smaller reductions in crime, and paying for enough police and security to reduce crime to zerowould be tremendously expensive. That's the trade-off this society faces. The production possibilities model does not tell us where on the curve a particular economy will operate. Figure 2.5 The Combined Production Possibilities Curve for Alpine Sports. 1.1. If all resources in the economy where allocated to produci. The following graph illustrates these ideas using a production possibilities frontier between healthcare and education. Direct link to Letladi Sebesho's post In the book 'Principles o, Posted 4 years ago. However, improvements in productive efficiency take time to discover and implement, and economic growth happens only gradually. Direct link to Louis Lepper's post I don't get the answer to, Posted 3 years ago. Workers, for example, specialize in particular fields in which they have a 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. Thus, all choices along a given PPF like B, C, and D display productive efficiency, but R does not. Suppose society has chosen to operate at point B, and it is considering producing more education. 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, If on the one hand, very few resources are currently committed to education, then an increase in resources used for education can bring relatively large gains. Become a member. At point A, Alpine Sports produces 350 pairs of skis per month and no snowboards. 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. In the production possibilities framework, economic growth is depicted by the PPF It has two plants, Plant R and Plant S, at which it can produce these goods. However, any choice inside the production possibilities frontier is productively inefficient and wasteful because it is possible to produce more of one good, the other good, or some combination of both goods. 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 opportunity cost would be the healthcare society has to forgo. c. a downward-sloping straight line. Similarly, the society could allocate all of its resources to producing education, and none to producing healthcare, as shown at point F. Alternatively, the society could choose to produce any combination of health care and education shown on the production possibilities frontier. At point A, all available resources (i.e. 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). Conversely, the U.S. can produce a lot of wheat per acre, but not much sugar cane. The opportunity cost of skis at Plant 2 is 1 snowboard per pair of skis. The first difference between a budget constraint and a production possibilities frontier is that the PPF, because its looking at societal choice, is going to have much larger numbers on the axes than those on an individuals budget constraint. 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. She also modified the first plant so that it could produce both snowboards and skis. What does the slope of the PPF measure? Why is the PPF downward sloping? 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. 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. This situation is illustrated by the production possibilities frontier in Figure 1. Now suppose Alpine Sports is fully employing its factors of production. This can be illustrated by the PPFs of the two countries in the following graphs. The PPF is downward sloping because it depicts the trade-off between two products. In applying the model, we assume that the economy can produce two goods, and we assume that technology and the factors of production available to the economy remain unchanged. Should the government promote the product or what? The downward sloping nature of the PPC is due to the law of increasing opportunity cost. The combined production possibilities curve for the firms three plants is shown in Figure 2.5 The Combined Production Possibilities Curve for Alpine Sports. Created by Sal Khan. In the chapter on International Trade you will learn that countries differences in comparative advantage determine which goods they will choose to produce and trade. 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. Society can choose any combination of the two goods on or inside the PPF. I don't understand: if we don't raise amount of resourches for healtccare, why we reduce amount of resourches for education? 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. The exhibit gives the slopes of the production possibilities curves for each plant. We can use the production possibilities model to examine choices in the production of goods and services. The second plant, while smaller than the first, was designed to produce snowboards as well as skis. This is a result of transferring resources from the production of one good to another according to comparative advantage. Suppose it considers moving from point B to point C. What would the opportunity cost be for the additional education? 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). Producing a snowboard in Plant 3 requires giving up just half a pair of skis. Textbook content produced by OpenStax is licensed under a Creative Commons Attribution License . 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. In this case we have categories of goods rather than specific goods. Production Possibility Frontier for the U.S. and Brazil. 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. And is this the case of allocative inefficiency? In the book 'Principles of Microeconomics' where this article is taken from, budget constraints are discussed first then PPF. What this means is that from point A to B, the decrease in healthcare is small, while the gain in education is large. Just as with Alphonsos budget constraint, the slope of the production possibilities frontier shows the opportunity cost. The U.S. has comparative advantage in wheat and Brazil has comparative advantage in sugar cane. In the first case, a society may discover that it has been using its resources inefficiently, in which case by improving efficiency and producing on the production possibilities frontier, it can have more of all goods (or at least more of some and less of none). The negative slope of the production possibilities curve reflects the scarcity of the plants capital and labor. The general rule is when one is allocating only a single scarce resource, the trade-off (e.g. We measure the additional education by the horizontal distance between B and C. The foregone healthcare is given by the vertical distance between B and C. The slope of the PPF between B and C is (approximately) the vertical distance (the rise) over the horizontal distance (the run). If society has a total of 10 teachers, education can be provided to a maximum of 250 students. While every society must choose how much of each good or service it should produce, it does not need to produce every single good it consumes. If the society were to allocate all of its resources to healthcare, it could produce at point A. Graphically, the rise is small and the run is large so the slope (which is the ratio of rise over run) is flat. Clearly, Brazil has a lower opportunity cost of producing sugar cane (in terms of wheat) than the U.S. 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). Posted 3 years ago. Figure 2.4 Production Possibilities at Three Plants. Each of the plants, if devoted entirely to snowboards, could produce 100 snowboards. Suppose two countries, the US and Brazil, need to decide how much they will produce of two crops: sugar cane and wheat. The attempt to provide it requires resources; it is in that sense that we shall speak of the economy as producing security. The U.S. PPF is flatter than the Brazil PPF implying that the opportunity cost of wheat in terms of sugar cane is lower in the U.S. than in Brazil. 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.
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