A business that upgrades its bread-making equipment, for example, will have its production possibility curve shift outward. A production–possibility frontier (PPF), production possibility curve (PPC), or production possibility boundary (PPB), or Transformation curve/boundary/frontier is a curve which shows various combinations of the amounts of two goods which can be produced within the given resources and technology/a graphical representation showing all the possible options of output for two products that can be … 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. We often think of the loss of jobs in terms of the workers; they have lost a chance to work and to earn income. 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. 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. The production possibilities model suggests that specialization will occur. That would bring ski production to 300 pairs, at point B. An economy that is operating inside its production possibilities curve could, by moving onto it, produce more of all the goods and services that people value, such as food, housing, education, medical care, and music. In the summer of 1929, however, things started going wrong. The sensible thing for it to do is to choose the plant in which snowboards have the lowest opportunity cost—Plant 3. Figure 2.9 “Efficient Versus Inefficient Production” illustrates the result. The economy had moved well within its production possibilities curve. An economy’s factors of production are scarce; they cannot produce an unlimited quantity of goods and services. The production possibilities curve shown suggests an economy that can produce two goods, food and clothing. Leftward shift of PPF shows the decrease in resources or degradation of technology in the economy. It had enjoyed seven years of dramatic growth and unprecedented prosperity. Local and state governments also increased spending in an effort to prevent terrorist attacks. See Answer. A production possibility frontier is used to illustrate the concepts of opportunity cost, trade-offs and also show the effects of economic growth. One way the PPF can shift outwards is if there is an increase in the active labour supply. The production possibility curve is the graphical illustration of the different combinations of two goods that the economy could make with all its resources being utilized. Furthermore, an inward shift is also possible. In terms of the production possibilities curve in Figure 2.7 “Spending More for Security”, the choice to produce more security and less of other goods and services means a movement from A to B. Now suppose Alpine Sports is fully employing its factors of production. A production possibilities curve shows the combinations of two goods an economy is capable of producing. We would say that Plant 1 has a comparative advantage in ski production. Previous posts have gone over the description and construction of the production possibilities frontier, but have always assumed that the PPF stayed where it was or that everything else was held constant. If Alpine Sports selects point C in Figure 2.9 “Efficient Versus Inefficient Production”, for example, it will assign Plant 1 exclusively to ski production and Plants 2 and 3 exclusively to snowboard production. The production possibilities curve is also called the PPF or the production possibilities frontier. The opportunity cost is the value of the next best alternative that is foregone while making the choices. To see this page as it is meant to appear, please enable your Javascript! When factors of production are allocated on a basis other than comparative advantage, the result is inefficient production. The result is a far greater quantity of goods and services than would be available without this specialization. Some workers are without jobs, some buildings are without occupants, some fields are without crops. Now consider what would happen if Ms. Ryder decided to produce 1 more snowboard per month. It is the amount of the good on the vertical axis that must be given up in order to free up the resources required to produce one more unit of the good on the horizontal axis. Airports around the world hired additional agents to inspect luggage and passengers. Which of the following will not shift a country’s production possibilities frontier outward ? Economists conclude that it is better to be on the production possibilities curve than inside it. Plant R has a comparative advantage in producing calculators. The economy produces SA units of security and OA units of all other goods and services per period. The slope between points B and B′ is −2 pairs of skis/snowboard. Thus, with the growth of the economy, the production possibility curve shifts outward. 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. 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. The bowed-out curve of Figure 2.5 “The Combined Production Possibilities Curve for Alpine Sports” becomes smoother as we include more production facilities. The table in Figure 2.2 “A Production Possibilities Curve” gives three combinations of skis and snowboards that Plant 1 can produce each month. Suppose the first plant, Plant 1, can produce 200 pairs of skis per month when it produces only skis. Its land is devoted largely to nonagricultural use. In this video I explain how the production possibilities curve shifts when there is a change in resources or a change in technology. Because the production possibilities curve for Plant 1 is linear, we can compute the slope between any two points on the curve and get the same result. PPF - Outward Shift Analysis I Theme 1 Micro - YouTube. 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. Mcq Added by: Adden wafa. The increase in resources devoted to security meant fewer “other goods and services” could be produced. 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. In either case, production within the production possibilities curve implies the economy could improve its performance. 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. Could an economy that is using all its factors of production still produce less than it could? Of course, an economy cannot really produce security; it can only attempt to provide it. Slope of production possibility curve (PPC) shows opportunity cost of product shown on x axis and outward bowed PPC shows increasing slope and thus increasing opportunity cost. 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. All choices along the curve shows production efficiency of both goods. 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. Could it still operate inside its production possibilities curve? These are also illustrated with a production possibilities curve. We can think of this as the opportunity cost of producing an additional snowboard at Plant 1. Suppose Alpine Sports operates the three plants we examined in Figure 2.4 “Production Possibilities at Three Plants”. 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. Scarcity implies that a production possibilities curve is downward sloping; the law of increasing opportunity cost implies that it will be bowed out, or concave, in shape. On the other hand, Figure 9 shows lesser outward shift of the present curve PP from point В to the future curve P 1 P 1 when less capital goods are produced in the future. 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 segment of the curve around point B is magnified in Figure 2.3 “The Slope of a Production Possibilities Curve”. Driven by private … An economy that fails to make full and efficient use of its factors of production will operate inside its production possibilities curve. Notice also that this curve has no numbers. She added a second plant in a nearby town. To construct a production possibilities curve, we will begin with the case of a hypothetical firm, Alpine Sports, Inc., a specialized sports equipment manufacturer. 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. At point A, Alpine Sports produces 350 pairs of skis per month and no snowboards. Asked by Wiki User. Nations specialize as well. Alpine Sports can thus produce 350 pairs of skis per month if it devotes its resources exclusively to ski production. Specialization means that an economy is producing the goods and services in which it has a comparative advantage. Keep in mind that some texts will call it the production possibilities curve (PPC) while this post calls it the production possibilities frontier. Each of the plants, if devoted entirely to snowboards, could produce 100 snowboards. As we include more and more production units, the curve will become smoother and smoother. Explain the concept of the production possibilities curve and understand the implications of its downward slope and bowed-out shape. Thus, the economy chose to increase spending on security in the effort to defeat terrorism. 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. Now draw the combined curves for the two plants. It can shift to ski production at a relatively low cost at first. The curve shown combines the production possibilities curves for each plant. Suppose the firm decides to produce 100 radios. Figure 2.9 Efficient Versus Inefficient Production. We will make use of this important fact as we continue our investigation of the production possibilities curve. 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′. Now suppose that, to increase snowboard production, it transfers plants in numerical order: Plant 1 first, then Plant 2, and finally Plant 3. It can produce skis and snowboards simultaneously as well. It is not necessary that the production takes place only on the PP Curve. The production of both goods rises. Ex- Labour becoming more skilled, improvement in technology, increase in productivity of land. First, the economy might fail to use fully the resources available to it. In that case, it produces no snowboards. If all the factors of production that are available for use under current market conditions are being utilized, the economy has achieved full employment. 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. The gains we achieve through specialization are enormous. When resources are underemployed or inefficiently used, then production does not take place on PP Curve. 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. Suppose a manufacturing firm is equipped to produce radios or calculators. Two years later she added a third plant in another town. It suggests that to obtain efficiency in production, factors of production should be allocated on the basis of comparative advantage. Figure 2.6 Production Possibilities for the Economy. Assumptions. 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). 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 fact that the opportunity cost of additional snowboards increases as the firm produces more of them is a reflection of an important economic law. An economy cannot operate on its production possibilities curve unless it has full employment. The opportunity cost of each of the first 100 snowboards equals half a pair of skis; each of the next 100 snowboards has an opportunity cost of 1 pair of skis, and each of the last 100 snowboards has an opportunity cost of 2 pairs of skis. Wiki User Answered . The steeper the curve, the greater the opportunity cost of an additional snowboard. A production possibilities curve is a graphical representation of the alternative combinations of goods and services an economy can produce. Second, it might not allocate resources on the basis of comparative advantage. The firm then starts producing snowboards. The bowed-out shape of the production possibilities curve results from allocating resources based on comparative advantage. In material terms, the forgone output represented a greater cost than the United States would ultimately spend in World War II. Specialization implies that an economy is producing the goods and services in which it has a comparative advantage. Producing more skis requires shifting resources out of snowboard production and thus producing fewer snowboards. Diagram. They continued to fall for several years. 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. On production possibility curve P’P’, the economy can produce more goods than on curve PP. This curve depicts an entire economy that produces only skis and snowboards. By 1933, more than 25% of the nation’s workers had lost their jobs. Instead, it lays out the possibilities facing the economy. Producing a snowboard in Plant 3 requires giving up just half a pair of skis. Between points A and B, for example, the slope equals −2 pairs of skis/snowboard (equals −100 pairs of skis/50 snowboards). It helpz to make notes of class 11, Copyright © 2021 LEARNINCOMMERCE - WordPress Theme : By Offshore Themes, Sorry, you have Javascript Disabled! This production possibilities curve includes 10 linear segments and is almost a smooth curve. We will generally draw production possibilities curves for the economy as smooth, bowed-out curves, like the one in Panel (b). In the section of the curve shown here, the slope can be calculated between points B and B′. Top Answer . Put calculators on the vertical axis and radios on the horizontal axis. The plant for which the opportunity cost of an additional snowboard is greatest is the plant with the steepest production possibilities curve; the plant for which the opportunity cost is lowest is the plant with the flattest production possibilities curve. Production Possibilities. The next 100 pairs of skis would be produced at Plant 2, where snowboard production would fall by 100 snowboards per month. 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. It illustrates the production possibilities model. In drawing production possibilities curves for the economy, we shall generally assume they are smooth and “bowed out,” as in Panel (b). The slopes of the production possibilities curves for each plant differ. Economic growth is shown by a shift of the production possibilities curve outward and to the right. What factors that would shift the production possibility curve inward or outward? In this example, production moves to point B, where the economy produces less food (FB) and less clothing (CB) than at point A. Does the production take place only on PP Curve? We have already seen that an additional snowboard requires giving up two pairs of skis in Plant 1. This is a result of transferring resources from the production of one good to another according to comparative advantage. We shall examine the significance of the bowed-out shape of the curve in the next section. Two things could leave an economy operating at a point inside its production possibilities curve. Imagine that you are suddenly completely cut off from the rest of the economy. a. an inward shift in the production possibilities curve b. an outward shift in the production possibility curve\ c. a flatter production possibilities curve d. a steeper production possibilities curve e. greater unemployment of labor. 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. 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. The result is the bowed-in curve AB′C′D. The decision to devote more resources to security and less to other goods and services represents the choice we discussed in the chapter introduction. 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. Producing more snowboards requires shifting resources out of ski production and thus producing fewer skis. As a result of a failure to achieve full employment, the economy operates at a point such as B, producing FB units of food and CB units of clothing per period. Plant 3 would be the last plant converted to ski production. 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. Figure 2.4 Production Possibilities at Three Plants. Figure 2.4 “Production Possibilities at Three Plants” shows production possibilities curves for each of the firm’s three plants. 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. In radios? 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. Production Possibility Frontier (PPF), also known as Production Possibility Curve (PPC) is a concept that discusses this economic problem and illustrates how to make choices in a scarcity situation. Production and employment fell. The opportunity cost of skis at Plant 2 is 1 snowboard per pair of skis. 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. 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. It is hard to imagine that most of us could even survive in such a setting. The production possibility frontier will shift outward when there is and increase in the productive resources. The opportunity cost of an additional snowboard at each plant equals the absolute values of these slopes (that is, the number of pairs of skis that must be given up per snowboard). 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. This model graphically represents a hypothetical situation of how to make a choice between two goods. The outward or rightward shift of the Production Possibility Curve reflects the growth of resources or the advancement of technology. 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 Great Depression was a costly experience indeed. Producing 1 additional snowboard at point B′ requires giving up 2 pairs of skis. Which one will it choose to shift? As we combine the production possibilities curves for more and more units, the curve becomes smoother. 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. In this case we have categories of goods rather than specific goods. The increase in the amount of capital, natural and human resources and progress in technology are determinants of economic growth. The law also applies as the firm shifts from snowboards to skis. Suppose further that all three plants are devoted exclusively to ski production; the firm operates at A. 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. (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. This article covers, 1. 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. 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. The exhibit gives the slopes of the production possibilities curves for each of the firm’s three plants. 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