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. Suppose a society desires two products: health care and education. Workers, for example, specialize in particular fields in which they have a comparative advantage. Were now readyto address the differences between societys PPF and an individuals budget constraint. While every society must choose how much of each good it should produce, it does not need to produce every single good it consumes. At point A, all available resources are devoted to healthcare and none are left for education. MicroEcon Ch 2 Quiz Flashcards | Quizlet The production possibilities frontier can illustrate two kinds of efficiency: productive efficiency and allocative efficiency. 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. She also modified the first plant so that it could produce both snowboards and skis. An economys factors of production are scarce; they cannot produce an unlimited quantity of goods and services. . Also, explain why all points inside of that curve represent inefficient outcomes. To see this relationship more clearly, examine Figure 2.3 The Slope of a Production Possibilities Curve. The opportunity cost would be the health care that society has to give up. Direct link to Andrea Burgio's post I dont know if i'm missin, Posted 2 years ago. The study of economics does not presume to tell a society what choice it should make along its production possibilities frontier. Much of the land in the United States has a comparative advantage in agricultural production and is devoted to that activity. On the other hand, if a large number of resources are already committed to education, then committing additional resources will bring relatively smaller gains. Had the firm based its production choices on comparative advantage, it would have switched Plant 3 to snowboards and then Plant 2, so it would have operated at point C. It would be producing more snowboards and more pairs of skisand using the same quantities of factors of production it was using at B. During the Second World War, Germanys factories were decimated. The attempt to provide it requires resources; it is in that sense that we shall speak of the economy as producing security. With trade, goods are produced where the opportunity cost is lowest, so total production increases, benefiting both trading parties. How is it different? Suppose society has chosen to operate at point B, and it is considering producing more education. 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. What is a budget constraint? Most important, the production possibilities frontier clearly shows the tradeoff between healthcare and education. Instead, it lays out the possibilities facing the economy. Graphically, the rise is small and the run is large so the slope (which is the ratio of rise over run) is flat. A production possibilities frontier defines the set of choices society faces for the combinations of goods and services it can produce given the resources available. This situation would be extreme and even ridiculous. In the second case, as resources grow over a period of years (e.g., more labor and more capital), the economy grows. Its resources were fully employed; it was operating quite close to its production possibilities curve. While individuals face budget and time constraints, societies face the constraint of limited resources (e.g. This opportunity cost equals the absolute value of the slope of the production possibilities curve. Explain why societies cannot make a choice above their production possibilities frontier and should not make a choice below it. On the other hand, if a large number of resources are already committed to education, then committing additional resources will bring relatively smaller gains. Suppose that Alpine Sports is producing 100 snowboards and 150 pairs of skis at point B. There are more similarities than differences, so for now focus on the similarities. then you must include on every digital page view the following attribution: Use the information below to generate a citation. Because the PPF is downward sloping from left to right, the only way society can obtain more education is by giving up some healthcare. Considering the situation in Figure 1 (shown again below), suppose we have only two types of resources: doctors and teachers. If the society were to allocate all of its resources to healthcare, it could produce at point A. Clearly, the transfer of resources to the effort to enhance national security reduces the quantity of other goods and services that can be produced. Wouldn't allocative efficiency occur at the origin? This situation is illustrated by the production possibilities frontier in Figure 1. Economists use a modelcalled the production possibilities frontier (PPF) to explain the constraints society faces in deciding what to produce. Notice the curve still has a bowed-out shape; it still has a negative slope. The study of economics does not presume to tell a society what choice it. 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. What are the similarities between a consumers budget constraint and societys production possibilities frontier, not just graphically but analytically? https://openstax.org/books/principles-economics-3e/pages/1-introduction, https://openstax.org/books/principles-economics-3e/pages/2-2-the-production-possibilities-frontier-and-social-choices, Creative Commons Attribution 4.0 International License, Interpret production possibilities frontier graphs, Contrast a budget constraint and a production possibilities frontier, Explain the relationship between a production possibilities frontier and the law of diminishing returns, Contrast productive efficiency and allocative efficiency. It retains its negative slope and bowed-out shape. In effect, the production possibilities frontier plays the same role for society as the budget constraint plays for Charlie. 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. The absolute value of the slope of a production possibilities curve measures the opportunity cost of an additional unit of the good on the horizontal axis measured in terms of the quantity of the good on the vertical axis that must be forgone. In addition, over time, improvements in technology can increase the level of production with given resources, and hence push out the PPF. What is productive efficiency? 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. It also suffered many human casualties, both soldiers and civilians. 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? Now suppose Alpine Sports is fully employing its factors of production. 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. 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. Direct link to tamaraqonitam's post What happen if society wa, Posted 3 months ago. An individual production shift in the PPF means that a change in technology or resources affects production of each product in different ways, creating a skewed shift. This production possibilities frontier shows a tradeoff between devoting social resources to healthcare and devoting them to education. Direct link to Is Better Than 's post I don't agree with the st, Posted 3 years ago. Why is PPF downward sloping and concave? - Study.com Suppose Plant 1 is producing 100 pairs of skis and 50 snowboards per month at point B. These values are plotted in a production possibilities curve for Plant 1. In this way, the law of increasing opportunity cost produces the outward-bending shape of the production possibilities frontier. If you're seeing this message, it means we're having trouble loading external resources on our website. Direct link to Al's post 1. Each of the plants, if devoted entirely to snowboards, could produce 100 snowboards. 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. Just as with Alphonsos budget constraint, the opportunity cost is shown by the, The budget constraints presented earlier in this chapter, showing individual choices about what quantities of goods to consume, were all straight lines. Comparative advantage is not the same as absolute advantage, which is when a country can produce more of a good.
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