Explain, in your own words, why the production possibilities frontier (PPF) is a downward-sloping curve. The firm then starts producing snowboards. Thus, the slope of the PPF is relatively steep near the horizontal-axis intercept. Suppose a society desires two products, healthcare and education. It can shift to ski production at a relatively low cost at first. 2.2 The Production Possibilities Frontier and Social Choices 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. Society can choose any combination of the two goods on or inside the PPF. The downward slope of the production possibilities curve is an implication of scarcity. 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. . For the sake of concreteness, you can imagine that in the movement from D to F, the last few doctors must become high school science teachers, the last few nurses must become school librarians rather than dispensers of vaccinations, and the last few emergency rooms are turned into kindergartens. Due to its climatic conditions, Brazil can produce quite a bit of sugar cane per acre but not much wheat. This situation would be extreme and even ridiculous. 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. Suppose it considers moving from point B to point C. What would the opportunity cost be for the additional education? The fact that the opportunity cost of additional snowboards increases as the firm produces more of them is a reflection of an important economic law. 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. Similarly, as additional resources are added to health care, moving from bottom to top on the vertical axis, the initialgains are fairly large but again gradually diminish. Direct link to Louis Lepper's post I don't get the answer to, Posted 3 years ago. As it does, the production possibilities frontier for a society will shift outward and society will be able to afford more of all goods. There are no specific numbers because we do not know the exact amount of resources this imaginary economy has, nor do we know how many resources it takes to produce healthcare and how many resources it takes to produce education. At point A, all available resources (i.e. The decision to devote more resources to security and less to other goods and services represents the choice we discussed in the chapter introduction. By now you might be saying, Hey, this PPF is sounding like the budget constraint. If so, read the following Clear It Up feature. 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. Suppose it considers moving from point B to point C. What would be the opportunity cost 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. Suppose Plant 1 is producing 100 pairs of skis and 50 snowboards per month at point B. We can think of this as the opportunity cost of producing an additional snowboard at Plant 1. budget line) will be constant, but when there is more than one scarce resources, the trade-off will be increasingly costly (e.g. As we include more and more production units, the curve will become smoother and smoother. Why is a production possibilities frontier typically drawn as a curve, rather than a straight line? 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. Understand specialization and its relationship to the production possibilities model and comparative advantage. Suppose a society desires two products: health care and education. To shift from B to B, Alpine Sports must give up two more pairs of skis per snowboard. Often how much of a good a country decides to produce depends on how expensive it is to produce it versus buying it from a different country. 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. Thus, a society must choose between tradeoffs in the present. Society can choose any combination of the two goods on or inside the PPF. Figure 2.9 Efficient Versus Inefficient Production. A production possibilities frontier showing health care and education. Over time, a growing economy will tend to shift the PPF outwards. Countries tend to have different opportunity costs of producing a specific good, either because of different climates, geography, technology, or skills. The example of choosing between catching rabbits and gathering berries illustrates how opportunity cost works. The combined production possibilities curve for the firms three plants is shown in Figure 2.5 The Combined Production Possibilities Curve for Alpine Sports. Suppose Alpine Sports expands to 10 plants, each with a linear production possibilities curve. In this example, production moves to point B, where the economy produces less food (FB) and less clothing (CB) than at point A. As we saw earlier, the curvature of a countrys PPF gives us information about the tradeoff between devoting resources to producing one good versus another. 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). 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. 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 begin at point A, with all three plants producing only skis. As a firm moves from any one of these choices to any other, either healthcare increases and education decreases or vice versa. 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. It is hard to imagine that most of us could even survive in such a setting. Suppose society has chosen to operate at point B, and it is considering producing more education. Bowed when -factors of production are heterogeneous (Some laborers are better at one thing than the other) OR The study of economics does not presume to tell a society what choice it. If it chooses to produce at point A, for example, it can produce FA units of food and CA units of clothing. Figure 1 (shown again). 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. Production Possibility Frontier Questions and Answers 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. Figure 2.4 Production Possibilities at Three Plants shows production possibilities curves for each of the firms three plants. 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. During the Second World War, Germanys factories were decimated. When factors of production are allocated on a basis other than comparative advantage, the result is inefficient production. Production totals 350 pairs of skis per month and zero snowboards. The slope of the PPF gives the opportunity cost of producing an additional unit of wheat. Opportunity cost is the trade-off that one makes when deciding between two options. 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). Considering the situation in Figure 1 (shown again below), suppose we have only two types of resources: doctors and teachers. 1. As discussed in class, what fundamental question - Chegg 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. An economy cannot operate on its production possibilities curve unless it has full employment. If however it had devoted all of its resources to producing sugar cane instead, it would be producing a much larger amount than the U.S., at point B. When you open your PPF Account you will get a pass-book which will be updated everytime you make a transaction. At its most basic, allocative efficiency means producers supply the quantity of each product that consumers demand. It comes from the production processes for producing the two goods, and the limited amounts of resources available to use for that purpose. (I mean, we should move point A higher and don't change point F.) The question about task 1 in Self-Check questions, "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.". In drawing production possibilities curves for the economy, we shall generally assume they are smooth and bowed out, as in Panel (b). Plant 3 would be the last plant converted to ski production. With all three of its plants producing skis, it can produce 350 pairs of skis per month (and no snowboards). Draw the production possibilities curve for Plant R. On a separate graph, draw the production possibilities curve for Plant S. Which plant has a comparative advantage in calculators? (Scarcity principle) The slope of the PPC measures all possible combinations of two goods, which an economy can produce with available resources. Second, it might not allocate resources on the basis of 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 health care. Theres another way to think about this. The attempt to provide it requires resources; it is in that sense that we shall speak of the economy as producing security. Because the PPF is downward sloping from left to right, the only way society can obtain more education is by giving up some healthcare. Suppose further that all three plants are devoted exclusively to ski production; the firm operates at A. Wed love your input. The teachers, though, are good at education, and not very good at healthcare. Just because you can make a billion phones because it is along the PPF curve is not reasonable. Figure 2.4 Production Possibilities at Three Plants. OpenStax is part of Rice University, which is a 501(c)(3) nonprofit. Production-possibility frontier - Wikipedia we learned that every society faces the problem of scarcity, where limited resources conflict with unlimited needs and wants. Some workers are without jobs, some buildings are without occupants, some fields are without crops. And when they move, the society doesnt lose much healthcare, because the teachers werent very good at that. In that case, it produces no snowboards. c. a downward-sloping straight line. The first is the fact that the budget constraint is a straight line. Understand the difference between comparative advantage and . If the society were to allocate all of its resources to healthcare, it could produce at point A. In image (b), the U.S.s Sugar Cane production is nearly half the production of its wheat. Now suppose Alpine Sports is fully employing its factors of production. However, economics can point out that some choices are unambiguously better than others. In Plant 2, she must give up one pair of skis to gain one more snowboard. Suppose it considers moving from point B to point C. What would the opportunity cost be for the additional education? Conversely, the opportunity cost of sugar cane is lower in Brazil. 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. In this way, the law of increasing opportunity cost produces the outward-bending shape of the production possibilities frontier. Here they are, the 100 best restaurants in New York City, ranked. 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. The production possibilities frontier can illustrate two kinds of efficiency: productive efficiency and allocative efficiency. Airports around the world hired additional agents to inspect luggage and passengers. We would say that Plant 1 has a comparative advantage in ski production. 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. 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. Suppose the first plant, Plant 1, can produce 200 pairs of skis per month when it produces only skis. But the direction that PPF is curved comes from the way that the trade-offs change. All choices on the PPF in Figure 2.4, including A, B, C, D, and F, display productive efficiency. The reason for this difference is pretty simple: the slope of a budget line is defined as the ratio of the prices of the two goods or services. In other words, the products are limited because the resources are limited.