In contrast, the PPF has a curved shape because of the law of the diminishing returns. 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. Suppose there is an improvement in medical technology that enables more healthcare to be provided with the same amount of resources. Production Possibility Frontier for the U.S. and Brazil. However, additional increases typically cause relatively larger increases in the opportunity cost of reducing crime, and paying for enough police and security to reduce crime to nothing at all would be a tremendously high opportunity cost. 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. Production Possibility Frontier Questions and Answers Production totals 350 pairs of skis per month and zero snowboards. The steeper the curve, the greater the opportunity cost of an additional snowboard. They continued to fall for several years. Suppose society has chosen to operate at point B, and it is considering producing more education. The increase in resources devoted to security meant fewer other goods and services could be produced. Suppose society has chosen to operate at point B, and its considering producing more education. 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. the PPF). Check with . Now consider the other end, at the lower right, of the production possibilities frontier. The Production Possibilities Frontier | Microeconomics - Lumen Learning 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. We begin at point A, with all three plants producing only skis. Were now readyto address the differences between societys PPF and an individuals budget constraint. are not subject to the Creative Commons license and may not be reproduced without the prior and express written For example, children are seeing a doctor every day, whether they are sick or not, but not attending school. Workers, for example, specialize in particular fields in which they have a comparative advantage. 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. Wouldn't allocative efficiency occur at the origin? This can be illustrated by the PPFs of the two countries in the following graphs. The example of choosing between catching rabbits and gathering berries illustrates how opportunity cost works. We will make use of this important fact as we continue our investigation of the production possibilities curve. The related concept of marginal cost is the cost of producing one extra unit of something. This observation is based on the concept of efficiency. The opportunity cost of the first 200 pairs of skis is just 100 snowboards at Plant 1, a movement from point D to point C, or 0.5 snowboards per pair of skis. When countries engage in trade, they specialize in the production of the goods that they have a comparative advantage in, and trade part of that production for goods they do not have a comparative advantage in. MicroEcon Ch 2 Quiz Flashcards | Quizlet Production had plummeted by almost 30%. We recommend using a As it does, the production possibilities frontier for a society will shift outward and society will be able to afford more of all goods. This curve depicts an entire economy that produces only skis and snowboards. False. Suppose a society desires two products, healthcare and education. However, improvements in productive efficiency take time to discover and implement, and economic growth happens only gradually. The opportunity cost would be the health care that society has to give up. The reverse is also true; the U.S. has a lower opportunity cost of producing wheat than Brazil. b. a downward-sloping curve that is bowed inward. 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. 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. The most important difference between the two graphs, though, is that a budget constraint is a straight line, while a production possibilities curve is typically bowed outwards, i.e. The Great Depression was a costly experience indeed. This book uses the See full answer below. However, putting those marginal dollars into education, which is completely without resources at point A, can produce relatively large gains. Because the PPF is downward sloping from left to right, the only way society can obtain more education is by giving up some healthcare. In the section of the curve shown here, the slope can be calculated between points B and B. In the summer of 1929, however, things started going wrong. The particular mix of goods and services being producedthat is, the specific combination of healthcare and education chosen along the production possibilities frontiercan be shown as a ray (line) from the origin to a specific point on the PPF. Figure 1 (shown again). How did the war affect Germanys production possibilities curve? As time passes, the production possibilities frontier shifts outward due to the accumulation of inputs and technological progress. First, the economy might fail to use fully the resources available to it. Suppose Alpine Sports operates the three plants we examined in Figure 2.4 Production Possibilities at Three Plants. In other words, each resource is not worth the same at producing different products. Could it still operate inside its production possibilities curve? Between 1929 and 1942, the economy produced 25% fewer goods and services than it would have if its resources had been fully employed. 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. 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). In such a case, more of one good can be produced only by taking resources away from the production of another good. The result is the bowed-in curve ABCD. If you're behind a web filter, please make sure that the domains *.kastatic.org and *.kasandbox.org are unblocked. The production of both goods rises. These days, when you open a PPF account, the balance is available online. What is a budget constraint? As a firm moves from any one of these choices to any other, either healthcare increases and education decreases or vice versa. That's the trade-off this society faces. The curvature of the production possibilities frontier shows that as additional resources are added to education, moving from left to right along the horizontal axis, the original gains are fairly large, but gradually diminish. Bowed when -factors of production are heterogeneous (Some laborers are better at one thing than the other) OR In this way, the law of diminishing returns produces the outward-bending shape of the production possibilities frontier. When society reallocates resources from one product to another, the relative costs change, which means the slope of the PPF does also. (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 effect, the production possibilities frontier plays the same role for society as the budget constraint plays for Alphonso. 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. An economys factors of production are scarce; they cannot produce an unlimited quantity of goods and services. Understand the difference between comparative advantage and . True. The opportunity cost of skis at Plant 2 is 1 snowboard per pair of skis. a. better suited for the production of some goods than others. Allocative efficiency means that the particular mix of goods being producedthat is, the specific choice along the production possibilities frontierrepresents the allocation that society most desires. 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. These are also illustrated with a production possibilities curve. Some workers are without jobs, some buildings are without occupants, some fields are without crops. Increasing the availability of these goods would improve the standard of living. That is certainly one possible way of allocating a societys resources, but it would mean there would be no resources left for education. Lets dig into this. Textbook content produced by OpenStax is licensed under a Creative Commons Attribution License . At point A, the economy was producing SA units of security on the vertical axisdefense services and various forms of police protectionand OA units of other goods and services on the horizontal axis. As we choose more of one good and less of another, we are simply spending dollars on different items, but every dollar is worth the same in purchasing any item. The following graph illustrates these ideas using a production possibilities frontier between healthcare and education. At A all resources go to healthcare and at B, most go to healthcare. 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. (i) Why is PP curve downward sloping from left to right? (D 2006C) (ii 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. There are two major differences between a budget constraint and a production possibilities frontier. The Production Possibilities Frontier and Social Choices Direct link to Oubrae's post *My Review Question Answe, Posted 2 years ago. Draw and explain what would happen to this market if an . There, 50 pairs of skis could be produced per month at a cost of 100 snowboards, or an opportunity cost of 2 snowboards per pair of skis. Direct link to Sree Vishal's post Note the word *improvemen, Posted 4 years ago. When countries engage in trade, they specialize in the production of the goods in which they have comparative advantage, and trade part of that production for goods in which they do not have comparative advantage. Now draw the combined curves for the two plants. Society can choose any combination of the two goods on or inside the PPF. When you open your PPF Account you will get a pass-book which will be updated everytime you make a transaction. People are having cosmetic surgery on every part of their bodies, but no high school or college education exists. Why is the PPF downward sloping? Countries tend to have different opportunity costs of producing a specific good, either because of different climates, geography, technology, or skills. The decision to devote more resources to security and less to other goods and services represents the choice we discussed in the chapter introduction. Whats the difference between a budget constraint and a PPF? (Scarcity principle) The slope of the PPC measures all possible combinations of two goods, which an economy can produce with available resources. What this means is that from point A to B, the decrease in healthcare is small, while the gain in education is large. Of course, an economy cannot really produce security; it can only attempt to provide 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. Posted 3 years ago. At point A, all available resources are devoted to healthcare and none are left for education. 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. Explain, in your own words, why the production possibilities frontier (PPF) is a downward-sloping curve.

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