We can think of each of Ms. Ryder’s three plants as a miniature economy and analyze them using the production possibilities model. Opportunity costs can be found and calculated (when there are numbers) from a production possibilities curve. 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. Producing 1 additional snowboard at point B′ requires giving up 2 pairs of skis. These are also illustrated with a production possibilities curve. False This is a correct answer _____ Question 3 (Worth 5 points) If demand increases and supply simultaneously decreases, equilibrium price will rise. Production of Both … It has two plants, Plant R and Plant S, at which it can produce these goods. Production had plummeted by almost 30%. A production possibilities curve shows the combinations of two goods an economy is capable of producing. 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 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. 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. Such an allocation implies that the law of increasing opportunity cost will hold. The PPF simply shows the trade-offs in production volume between two choices. Suppose it begins at point D, producing 300 snowboards per month and no skis. 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. Alpine Sports can thus produce 350 pairs of skis per month if it devotes its resources exclusively to ski production. The production possibilities curves for the two plants are shown, along with the combined curve for both plants. 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. Which one will it choose to shift? 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). Explain the concept of the production possibilities curve and understand the implications of its downward slope and bowed-out shape. Imagine that you are suddenly completely cut off from the rest of the economy. This spending took a variety of forms. When resources are underemployed or inefficiently used, then production does not take place on PP Curve. The second plant, while smaller than the first, was designed to produce snowboards as well as skis. The points from A to F in the above diagram shows this. Please share your supplementary material! With all three of its plants producing skis, it can produce 350 pairs of skis per month (and no snowboards). 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 opportunity cost is the value of the next best alternative that is foregone while making the choices. 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. Use the production possibilities model to distinguish between full employment and situations of idle factors of production and between efficient and inefficient production. Assumptions. 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, the transfer of resources to the effort to enhance national security reduces the quantity of other goods and services that can be produced. We assume that the factors of production and technology available to each of the plants operated by Alpine Sports are unchanged. 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. Two years later she added a third plant in another town. 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. Now draw the combined curves for the two plants. We shall examine the significance of the bowed-out shape of the curve in the next section. The table shows the combinations of pairs of skis and snowboards that Plant 1 is capable of producing each month. outwards. Specialization means that an economy is producing the goods and services in which it has a comparative advantage. Production possibility frontier (also called production possibility curve) is a plot that shows the maximum outputs that an economy can produce from the available inputs (i.e. Plant 3, though, is the least efficient of the three in ski production. On production possibility curve P’P’, the economy can produce more goods than on curve PP. 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. b. PPC – a curve which shows the maximum potential output of one good, given the output of all other goods in an economy. (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 possibilities model does not tell us where on the curve a particular economy will operate. Suppose an economy produces only two types of goods, agricultural goods and manufactured goods. 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. In drawing production possibilities curves for the economy, we shall generally assume they are smooth and “bowed out,” as in Panel (b). To produce more of one good the production of the other good must be reduced and this happens due to scarcity of the resources. When factors of production are allocated on a basis other than comparative advantage, the result is inefficient production. A movement from A to B requires shifting resources out of the production of all other goods and services and into spending on security. The law also applies as the firm shifts from snowboards to skis. The table in Figure 2.2 “A Production Possibilities Curve” gives three combinations of skis and snowboards that Plant 1 can produce each month. It need not imply that a particular plant is especially good at an activity. The firm then starts producing snowboards. PPF - Outward Shift Analysis I Theme 1 Micro - YouTube. The decision to devote more resources to security and less to other goods and services represents the choice we discussed in the chapter introduction. 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′. Suppose that Alpine Sports is producing 100 snowboards and 150 pairs of skis at point B′. The steeper the curve, the greater the opportunity cost of an additional snowboard. 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. Figure 2.6 Production Possibilities for the Economy. Inefficient production implies that the economy could be producing more goods without using any additional labor, capital, or natural resources. We shall consider two goods and services: national security and a category we shall call “all other goods and services.” This second category includes the entire range of goods and services the economy can produce, aside from national defense and security. Production and employment fell. 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. 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. Improvement of technology and … Economic growth. 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. 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. That will require shifting one of its plants out of ski production. Production on the production possibilities curve ABCD requires that factors of production be transferred according to comparative advantage. The gains we achieve through specialization are enormous. As we combine the production possibilities curves for more and more units, the curve becomes smoother. 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. As the economy below increases production of corn, is loses some amount of robots (and vice versa). Alpine thus gives up fewer skis when it produces snowboards in Plant 3. Its resources were fully employed; it was operating quite close to its production possibilities curve. 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. Plants 2 and 3, if devoted exclusively to ski production, can produce 100 and 50 pairs of skis per month, respectively. Asked by Wiki User. 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. The curve is a downward-sloping straight line, indicating that there is a linear, negative relationship between the production of the two goods. 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. Production points inside the curve show an economy is not producing at its comparative advantage. The result is a far greater quantity of goods and services than would be available without this specialization. It can shift to ski production at a relatively low cost at first. When an economy is in a recession, it is operating inside the PPC. Thus, with the growth of the economy, the production possibility curve shifts outward. Economic growth is shown by a shift of the production possibilities curve outward and to the right. One way the PPF can shift outwards is if there is an increase in the active labour supply. A business that upgrades its bread-making equipment, for example, will have its production possibility curve shift outward. Does the production take place only on PP Curve? It helpz to make notes of class 11, Copyright © 2021 LEARNINCOMMERCE - WordPress Theme : By Offshore Themes, Sorry, you have Javascript Disabled! Putting its factors of production to work allows a move to the production possibilities curve, to a point such as A. Figure 2.4 “Production Possibilities at Three Plants” shows production possibilities curves for each of the firm’s three plants. 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. In this video I explain how the production possibilities curve shifts when there is a change in resources or a change in technology. 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. Put calculators on the vertical axis and radios on the horizontal axis. It had enjoyed seven years of dramatic growth and unprecedented prosperity. The increase in spending on security, to SA units of security per period, has an opportunity cost of reduced production of all other goods and services. All choices along the curve shows production efficiency of both goods. The production possibilities curve shown suggests an economy that can produce two goods, food and clothing. 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. If it fails to do that, it will operate inside the curve. Leftward shift of PPF shows the decrease in resources or degradation of technology in the economy. The Production possibility curve will shift under following two condition: (a) change in resources, (b) Change in technology of production for both the goods. Given the labor and the capital available at both plants, it can produce the combinations of the two goods at the two plants shown. The downward slope of the production possibilities curve is an implication of scarcity. Workers, for example, specialize in particular fields in which they have a comparative advantage. Each of the plants, if devoted entirely to snowboards, could produce 100 snowboards. If there are idle or inefficiently allocated factors of production, the economy will operate inside the production possibilities curve. 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. The outward or rightward shift of the Production Possibility Curve reflects the growth of resources or the advancement of technology. The bowed-out curve of Figure 2.5 “The Combined Production Possibilities Curve for Alpine Sports” becomes smoother as we include more production facilities. Production Possibilities. 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. The Great Depression was a costly experience indeed. Christie Ryder began the business 15 years ago with a single ski production facility near Killington ski resort in central Vermont. 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 will generally draw production possibilities curves for the economy as smooth, bowed-out curves, like the one in Panel (b). Mcq Added by: Adden wafa. Thus, the production possibilities curve not only shows what can be produced; it provides insight into how goods and services should be produced. Suppose Plant 1 is producing 100 pairs of skis and 50 snowboards per month at point B. Between 1929 and 1942, the economy produced 25% fewer goods and services than it would have if its resources had been fully employed. 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 greater the absolute value of the slope of the production possibilities curve, the greater the opportunity cost will be. 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. Some workers are without jobs, some buildings are without occupants, some fields are without crops. The slopes of the production possibilities curves for each plant differ. Jhakas Thus, the PPF is a dynamic, ever-changing tool. See Answer. Could it still operate inside its production possibilities curve? 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. Now suppose Alpine Sports is fully employing its factors of production. In Plant 2, she must give up one pair of skis to gain one more snowboard. The opportunity cost of skis at Plant 2 is 1 snowboard per pair of skis. Diagram. Even though each of the plants has a linear curve, combining them according to comparative advantage, as we did with 3 plants in Figure 2.5 “The Combined Production Possibilities Curve for Alpine Sports”, produces what appears to be a smooth, nonlinear curve, even though it is made up of linear segments. 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. Furthermore, an inward shift is also possible. At point A, Alpine Sports produces 350 pairs of skis per month and no snowboards. Thus, the economy chose to increase spending on security in the effort to defeat terrorism. In that case, it produces no snowboards. 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. 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