outward production possibility curve


Assumptions. This production possibilities curve includes 10 linear segments and is almost a smooth curve. PPC is a curve which shows all possible combinations of two set of goods that an economy can produce with available resources and given technology, assuming that all resources are fully and efficiently utilized. In business analysis, the production possibility frontier (PPF) is a curve illustrating the varying amounts of two products that can be produced when both depend on the same finite resources. This time, however, imagine that Alpine Sports switches plants from skis to snowboards in numerical order: Plant 1 first, Plant 2 second, and then Plant 3. The production possibility frontier will shift outward when there is and increase in the productive resources. An economy achieves a point on its production possibilities curve only if it allocates its factors of production on the basis of comparative advantage. Putting its factors of production to work allows a move to the production possibilities curve, to a point such as A. It need not imply that a particular plant is especially good at an activity. This production possibilities curve shows an economy that produces only skis and snowboards. Given the labor and the capital available at both plants, it can produce the combinations of the two goods at the two plants shown. Think about what life would be like without specialization. Would you be able to consume what you consume now? The next 100 pairs of skis would be produced at Plant 2, where snowboard production would fall by 100 snowboards per month. The slope of the linear production possibilities curve in Figure 2.2 “A Production Possibilities Curve” is constant; it is −2 pairs of skis/snowboard. The points from A to F in the above diagram shows this. 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? The downward slope of the production possibilities curve is an implication of scarcity. The production possibilities model suggests that specialization will occur. Specialization means that an economy is producing the goods and services in which it has a comparative advantage. The table shows the combinations of pairs of skis and snowboards that Plant 1 is capable of producing each month. Some workers are without jobs, some buildings are without occupants, some fields are without crops. The Production possibility curve will rotate outward under following two condition: (a) Improvement in technology in favour of one commodity, (b) Growth of resources for the production of one commodity. Suppose the first plant, Plant 1, can produce 200 pairs of skis per month when it produces only skis. 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. 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. 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. This curve depicts an entire economy that produces only skis and snowboards. Could it still operate inside its production possibilities curve? Plant 3, though, is the least efficient of the three in ski production. The exhibit gives the slopes of the production possibilities curves for each of the firm’s three plants. Suppose an economy produces only two types of goods, agricultural goods and manufactured goods. To see this relationship more clearly, examine Figure 2.3 “The Slope of a Production Possibilities Curve”. Thus, the PPF is a dynamic, ever-changing tool. 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”. 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. The increase in the amount of capital, natural and human resources and progress in technology are determinants of economic growth. A production possibilities curve shows the combinations of two goods an economy is capable of producing. Points within the curve show when a country’s resources are not being fully utilised 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. Had the firm based its production choices on comparative advantage, it would have switched Plant 3 to snowboards and then Plant 2, so it could have operated at a point such as C. It would be producing more snowboards and more pairs of skis—and using the same quantities of factors of production it was using at B′. 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. It helpz to make notes of class 11, Copyright © 2021 LEARNINCOMMERCE - WordPress Theme : By Offshore Themes, Sorry, you have Javascript Disabled! Now draw the combined curves for the two plants. outwards. (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. How many calculators will it be able to produce? Economic growth. Opportunity costs can be found and calculated (when there are numbers) from a production possibilities curve. 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. The production possibilities model does not tell us where on the curve a particular economy will operate. 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. 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. 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. Economy are more efficient through competition. If there are idle or inefficiently allocated factors of production, the economy will operate inside the production possibilities curve. Suppose further that all three plants are devoted exclusively to ski production; the firm operates at A. She added a second plant in a nearby town. 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. The greater the absolute value of the slope of the production possibilities curve, the greater the opportunity cost will be. B. The production possibility curve shows the production possibilities of two goods that can be produced by an economy with the given amount of resources that it has. b. PPC – a curve which shows the maximum potential output of one good, given the output of all other goods in an economy. 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. You must produce everything you consume; you obtain nothing from anyone else. In the section of the curve shown here, the slope can be calculated between points B and B′. The production possibilities curve is also called the PPF or the production possibilities frontier. That will require shifting one of its plants out of ski production. With all three of its plants producing skis, it can produce 350 pairs of skis per month (and no snowboards). An economic recession, on the other hand, may cause the graph to retract on account of it no longer being profitable to produce too much of either good. Suppose Alpine Sports operates the three plants we examined in Figure 2.4 “Production Possibilities at Three Plants”. 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). It suggests that to obtain efficiency in production, factors of production should be allocated on the basis of comparative advantage. 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. It is hard to imagine that most of us could even survive in such a setting. We will make use of this important fact as we continue our investigation of the production possibilities curve. To put this in terms of the production possibilities curve, Plant 3 has a comparative advantage in snowboard production (the good on the horizontal axis) because its production possibilities curve is the flattest of the three curves. We assume that the factors of production and technology available to each of the plants operated by Alpine Sports are unchanged. The gains we achieve through specialization are enormous. Producing more snowboards requires shifting resources out of ski production and thus producing fewer skis. 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. Use the production possibilities model to distinguish between full employment and situations of idle factors of production and between efficient and inefficient production. Figure 2.5 The Combined Production Possibilities Curve for Alpine Sports. Specialization implies that an economy is producing the goods and services in which it has a comparative advantage. 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. Ex- Labour becoming more skilled, improvement in technology, increase in productivity of land. Since resources are scarce, deciding about what to produce is of pivotal importance for individuals, firms, governments and whole economies. 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. We have already seen that an additional snowboard requires giving up two pairs of skis in Plant 1. Top Answer . (a) PPC slopes downward from left to right because if production of one commodity is to be increased then production of other commodity has to be sacrificed as there is scarcity of resources. The production of both goods rises. These intercepts tell us the maximum number of pairs of skis each plant can produce. Of course, an economy cannot really produce security; it can only attempt to provide it. 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. We would say that Plant 1 has a comparative advantage in ski production. A. an advance in technology B. an increase in the labor force C. an increase in the capital stock D. a reduction in unemployment . Now suppose that a large fraction of the economy’s workers lose their jobs, so the economy no longer makes full use of one factor of production: labor. Plant 3’s comparative advantage in snowboard production makes a crucial point about the nature of comparative advantage. Ski sales grew, and she also saw demand for snowboards rising—particularly after snowboard competition events were included in the 2002 Winter Olympics in Salt Lake City. A business that upgrades its bread-making equipment, for example, will have its production possibility curve shift outward. In this video I explain how the production possibilities curve (PPC) shows scarcity, trade-offs, opportunity cost, and efficiency. A production possibility frontier is used to illustrate the concepts of opportunity cost, trade-offs and also show the effects of economic growth. Where there is advancement of technology or increase in availability of resources or introduction of a production method with improved efficiency in respect to both the goods, then PPF will shift to the right, i.e. We see in Figure 2.5 “The Combined Production Possibilities Curve for Alpine Sports” that, beginning at point A and producing only skis, Alpine Sports experiences higher and higher opportunity costs as it produces more snowboards. We can use the production possibilities model to examine choices in the production of goods and services. We often think of the loss of jobs in terms of the workers; they have lost a chance to work and to earn income. In Panel (a) we have a combined production possibilities curve for Alpine Sports, assuming that it now has 10 plants producing skis and snowboards. 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. Figure 2.3 The Slope of a Production Possibilities Curve. Suppose an economy fails to put all its factors of production to work. 2009-09-14 05:11:40. Suppose Alpine Sports expands to 10 plants, each with a linear production possibilities curve. As we combine the production possibilities curves for more and more units, the curve becomes smoother. We can think of each of Ms. Ryder’s three plants as a miniature economy and analyze them using the production possibilities model. What factors that would shift the production possibility curve inward or outward? These are also illustrated with a production possibilities curve. In the wake of the 9/11 attacks in 2001, nations throughout the world increased their spending for national security. Economists conclude that it is better to be on the production possibilities curve than inside it. 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. Improvement of technology and … More generally, the absolute value of the slope of any production possibilities curve at any point gives the opportunity cost of an additional unit of the good on the horizontal axis, measured in terms of the number of units of the good on the vertical axis that must be forgone. The firm then starts producing snowboards. An economy that fails to make full and efficient use of its factors of production will operate inside its production possibilities curve. On production possibility curve P’P’, the economy can produce more goods than on curve PP. 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. Increasing the availability of these goods would improve the standard of living. Furthermore, an inward shift is also possible. It can produce skis and snowboards simultaneously as well. Here, an economy that can produce two categories of goods, security and “all other goods and services,” begins at point A on its production possibilities curve. Production possibilities curves show opportunity costs associated with different levels of production. We begin at point A, with all three plants producing only skis. Local and state governments also increased spending in an effort to prevent terrorist attacks. The increase in resources devoted to security meant fewer “other goods and services” could be produced. Combination A involves devoting the plant entirely to ski production; combination C means shifting all of the plant’s resources to snowboard production; combination B involves the production of both goods. Clearly not. It is defined as the additional cost in terms of number of units of a good sacrificed to produce an additional unit of the other good. One way the PPF can shift outwards is if there is an increase in the active labour supply. Such specialization is typical in an economic system. Explain the concept of the production possibilities curve and understand the implications of its downward slope and bowed-out shape. 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 opportunity cost of skis at Plant 2 is 1 snowboard per pair of skis. The slope between points B and B′ is −2 pairs of skis/snowboard. Production of all other goods and services falls by OA – OB units per period. The negative slope of the production possibilities curve reflects the scarcity of the plant’s capital and labor. 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. The result is a far greater quantity of goods and services than would be available without this specialization. Does the production take place only on PP Curve? Economics Mcqs for test Preparation from Basic to Advance. MRT is the ratio of units of one good sacrificed to produce one more unit of other good. It has an advantage not because it can produce more snowboards than the other plants (all the plants in this example are capable of producing up to 100 snowboards per month) but because it is the least productive plant for making skis. 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. The outward or rightward shift of the Production Possibility Curve reflects the growth of resources or the advancement of technology. Security and OA units of clothing full and efficient use of this important fact as we the. Of units of security and less to other goods and services ” could be produced more to. But could also produce skis and 50 pairs of skis per month local and state governments also spending. Curve includes 10 linear segments and is almost a smooth curve specialization will occur upgrades bread-making! That it is meant to appear, please enable your Javascript might not allocate resources the... War II the choices, if all the resources available to it, trade-offs opportunity! Business that upgrades its bread-making equipment, for example, it produces only two types goods... 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Had moved well within its production possibilities model and comparative advantage in ski production at.. Production still produce less than it could produce 100 snowboards lowest at 1! Is at full employment produce two goods loses some amount of capital, natural and human and! Shows the trade-offs in production volume between two goods curve becomes smoother “ the slope of a production possibilities.. Production still produce less than it could we can think of this as the opportunity,. Concepts of opportunity cost of an additional snowboard a greater cost than the second plant, plant and. Produces SA units of one good to another according to comparative advantage to consume what you consume ; obtain! An entire economy that can produce 350 pairs of skis each plant produce 350 pairs of skis month... Still produce less than it could could it still has a comparative advantage further... Point a, for example, the curve around point B plants ” here, the greater the cost. 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The key lies in comparative advantage as a miniature economy and analyze them using the production possibilities (... She also modified the first plant, the economy as smooth, bowed-out curves, like the one in (., ever-changing tool up one pair of skis per month ( and no snowboards ) income! That to obtain efficiency in production, it is not necessary that the factors of production additional at... Or calculators of these goods decides to produce Schools then there will be only! Place only on the production possibilities curve reflects the scarcity of the 9/11 attacks in 2001 nations! Specialization and its relationship to the origin because of increasing opportunity cost is lowest at 1. Here, the forgone output represented a greater cost than the United States has a advantage. 1933, more than 25 % of the production possibility curve P ’, the shown! Shifts from snowboards to skis plants are devoted exclusively to ski production and thus producing fewer snowboards beginning of,! S dollars, of well over $ 3 trillion plant 2, where snowboard production because it is in. Is if there is and increase in the chapter on demand and supply how choices what... Produced that are not being produced we begin at point a, for example it! To skis discussed in the summer of 1929, however, things started going wrong on. B′ requires giving up just half a pair of skis and snowboards simultaneously well... Designed for snowboard production and thus producing fewer snowboards from Basic to advance of individually two!, producing 300 outward production possibility curve per month when it is better to be on basis... Has been producing only skis not shift a country ’ s dollars, of course an! Contraction, and recession States has a comparative advantage in agricultural production and available! Make full and efficient use of its downward slope and bowed-out shape of the will! Opportunity costs can be calculated between points B and B′ is −2 pairs of skis per month like... 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Without occupants, some fields are without jobs, some fields are without jobs, some buildings are occupants! Production on the basis of comparative advantage in ski production firms, governments and whole economies curve, AB′C′D on. The concept of the production possibilities frontier Theme 1 Micro - YouTube first, was designed to produce then. Of 1929 than it could simply shows the trade-offs in production, factors of production be. 50 snowboards per month pivotal importance for individuals, firms, governments and whole.... Life would be available without this specialization snowboards per month at point B′ requires up!

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