Economics
Production Possibilities
Production possibilities refer to the various combinations of goods and services that an economy can produce given its resources and technology. It is represented graphically by a production possibilities curve, which illustrates the trade-offs between producing different goods. This concept helps to demonstrate the concept of scarcity and the need for efficient allocation of resources.
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10 Key excerpts on "Production Possibilities"
eBook - ePub- Arleen J Hoag, John H Hoag(Authors)
- 2006(Publication Date)
- WSPC(Publisher)
Chapter 3 Production PossibilitiesKey Topics Production Possibilities scarcity, choice, and opportunity cost law of increasing costs changing the assumptions — employment changing the assumptions — resources and technology Goals understand Production Possibilities understand that scarcity forces choice understand the law of increasing costs and why it is true understand what happens to Production Possibilities when the assumptions changeIn this chapter you will see one way in which an economist views the problem of scarcity, and you will review the fundamental fact that in making choices, costs are imposed. This will be accomplished using a simple model that reflects scarcity. The basic meaning of scarcity is that society cannot have as much as it wants of all goods. Goods are produced from resources, and resources are scarce. To get more of one good, some amount of another good must be given up. What determines the combinations of goods society can have? We need to know the amount of resources available and how to produce the goods we want from these resources. Knowledge of how to turn resources into output is called technology. So given the amount of resources and the technology, we can determine the combinations of output that society is capable of producing.A Model of ScarcityRecall that a model is used to simplify reality so that reality can be understood and, it is hoped, managed. The model that is about to be introduced, the Production Possibilities model, provides a clearer understanding of the resource allocation problem. The Production Possibilities model is designed to tell us as a society what combinations of output we could possibly choose. The assumptions of the Production Possibilities model are:1. Two alternative goods 2. Full employment of resources 3. Fixed amount of resources and technologyLet us first review these assumptions. The model considers output of only two different goods. In fact any number of goods could be included. But limiting the model to just two goods certainly makes the model easier to use and, more important, still contributes to an understanding of reality. Full employment of resources indicates that there will be no unemployment or underemployment of land, labor, capital, or entrepreneurship. We want to know what potential combinations of output we could produce with our greatest effort. A fixed amount of resources and technology tells us that we are producing at a given, fixed point in time. A realistic assumption is that there are only so many resources and a certain level of technology available at that moment. While it may be true that over time the amount of resources and technology may change, at the actual time of production they are fixed.
eBook - PDFMicroeconomics
A Contemporary Introduction
- William A. McEachern(Author)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 44 Part 1 Introduction to Economics 4. The Production Possibilities frontier, or PPF, shows the pro-ductive capabilities of an economy when all resources are used efficiently. The frontier’s bowed-out shape reflects the law of increasing opportunity cost, which arises because some re-sources are not perfectly adaptable to the production of dif-ferent goods. Over time, the PPF can shift in or out as a re-sult of changes in the availability of resources, in technology and know-how, or in the rules of the game. The PPF demon-strates several economic concepts, including efficiency, scarcity, opportunity cost, the law of increasing opportunity cost, eco-nomic growth, and the need for choice. 5. All economic systems, regardless of their decision-making processes, must answer three basic questions: What is to be produced? How is it to be produced? And for whom is it to be produced? Economies answer the questions differently, depending on who owns the re-sources and how economic activity is coordinated. Economies can be directed by market forces, by the central plans of government officials, or, in most cases, by a mix of the two. Opportunity cost 27 Sunk cost 30 Law of comparative advantage 31 Absolute advantage 31 Comparative advantage 32 Barter 32 Division of labor 33 Specialization of labor 33 Production Possibilities frontier (PPF) 35 Efficiency 35 Law of increasing opportunity cost 36 Economic growth 37 Economic system 39 Pure capitalism 40 Private property rights 40 Pure command system 41 Mixed system 42 Key Concepts 1.
eBook - PDF- Kumar, K Nirmal Ravi(Authors)
- 2021(Publication Date)
- Daya Publishing House(Publisher)
An allocation of a particular set (level) of scarce resources of the farmer gives rise to a This ebook is exclusively for this university only. Cannot be resold/distributed. definite combination of preferred enterprises. Given the total amount of resources, it is possible to allocate them in many different ways so that, different mixes of two possible enterprises can be produced by the farmer. This collection of all possible combinations of two enterprises that can be produced from a given amount of resources and a given stock of technological knowledge is called the Production Possibility Set. To decide what to produce and in what quantities, it is first necessary to know what is obtainable from the given level of resources. The limits of production of two enterprises or products for a given level of resources can be ascertained through PPC. Thus, PPC answers the problem: ‘What to produce?’ by the farmer in his production programme. A PPC is a graphical representation showing all possible combinations of two products that a farmer produces during a specified period of time with the given level of limited resources and technology. It assumes ceteris paribus concept to explain the Production Possibilities of two products for the given level of resources. This curve is a ‘frontier’ indicating the limits of production of two products under consideration for a given level of resources and technology. That is, it indicates that, there are certain maximum limits of production of two products and to achieve efficiency, the farmer must decide what combination of products to be produced. Along this frontier, there is productive efficiency. That means, if the farmer is fully utilizing his resources efficiently, then he will be producing the combinations of products on the PPC. It shows the maximum of each product that can be produced using all the resources at maximum efficiency.
eBook - PDFMicroeconomics
Private and Public Choice
- James Gwartney, Richard Stroup, Russell Sobel, David Macpherson(Authors)
- 2017(Publication Date)
- Cengage Learning EMEA(Publisher)
A point outside the Production Possibilities curve (such as point E) would be considered unattainable at the present time. A point inside the Production Possibilities curve (such as point D) is attainable, but producing that amount would mean that the economy is not making maximum use of its resources (some resources are being underutilized). Thus, point D is considered inefficient. Concept of Production Possibilities Curve for an Economy When an economy is using its limited resources efficiently, production of more clothing requires that the economy give up EXHIBIT 2 F ood Only clothing is produced A D E B C All output possibilities on the cu rv e are ef ficient Only f ood is produced T S S P oints inside the cur ve are inef ficient Po ints outside the cur ve are unattaina bl e Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-300 30 PART 1 THE ECONOMIC WAY OF THINKING More specifically, the Production Possibilities curve shows all of the maximum combi- nations of two goods that an economy will be able to produce: (1) given a fixed quantity of resources, (2) holding the level of technology constant, and (3) assuming that all resources are used efficiently. When these three conditions are met, the economy will be at the edge of its produc- tion possibilities frontier (where points A, B, and C lie), and producing more of one good C C will necessitate producing less of others. If condition 3 above is not met, and resources are being used inefficiently, an economy would be operating inside its Production Possibilities curve. If the level of resources and technology change (conditions 1 and 2), it will result in an outward shift in the Production Possibilities curve. We will return to these factors that can shift the Production Possibilities curve in a moment.
eBook - PDFEconomics
Principles & Policy
- William Baumol, Alan Blinder, John Solow, , William Baumol, Alan Blinder, John Solow(Authors)
- 2019(Publication Date)
- Cengage Learning EMEA(Publisher)
Looking at the same thing the other way, as we move downward to the right, the opportunity cost of acquiring wheat by giving up soybeans increases—more and more soybeans must be forgone per added bushel of wheat and successive addition to wheat output occurs. The Production Possibilities frontier is a curve that shows the maximum quantities of outputs it is possible to produce with the available resource quantities and the current state of technological knowledge. Figure 1 Production Possibilities Frontier for Production by a Single Farmer 40 30 20 10 0 10 20 30 38 52 65 60 Unattainable region A B C D E Wheat Soybeans Attainable region NOTE: Quantities are in thousands of bushels per year. Copyright 2020 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 42 Part 1 Getting Acquainted with Economics 3-2b The Principle of Increasing Costs We have just described a very general phenomenon with applications well beyond farming. The principle of increasing costs states that as the production of one good expands, the opportunity cost of producing another unit of this good generally increases. This principle is not a universal fact— exceptions do arise—but it does seem to be a technological regularity that applies to a wide range of economic activities. As our farming example suggests, the principle of increasing costs is based on the fact that resources tend to be at least somewhat specialized. So we lose some of their productivity when those resources are transferred from doing what they are relatively good at to what they are relatively bad at.
eBook - PDFAn Introduction to Australian Public Policy
Theory and Practice
- Sarah Maddison, Richard Denniss(Authors)
- 2013(Publication Date)
- Cambridge University Press(Publisher)
For example, the time spent reading this book is time that cannot be spent reading a magazine. Opportunity costs re fl ect the existence of scarcity. That is, if all resources were in fi nitely abun-dant, then there would be no need to ration them between competing purposes. However, the reality is that time, land, money, raw materials and the environment ’ s capacity to absorb pollution are all fi nite. This means that hard decisions need to be made, both by individuals and by society as a whole, about what we would rather do with our scarce resources. One way of representing opportunity cost is to construct a Production Possibility Frontier (PPF). The PPF is a highly simpli fi ed analytical device that shows the options (or trade-offs) that a society is confronted with. Figure 3.1 shows that if a country wants to put all of its resources into building roads it can build 1000 km of new road each year, or if it wants to put all of its resources into building subways it can build 400 km of new track each year. The diagram also shows that society can produce any combination of road and rail on the PPF, but it cannot produce any combinations outside the PPF. This outcome re fl ects the fact that society ’ s scarce resources are not being used ef fi ciently. The main point to be gained from analysing the PPF is that every time a government announces its intention to build a new road it has just reduced the opportunities to build new railways. 400 X Road 1000 All combinations along the line are possible Points outside the line are unachievable Railtrack Figure 3.1 The Production Possibility Frontier CHAPTER 3 THE ECONOMICS OF PUBLIC POLICY 53 The opportunity cost of something is what you give up in order to have it.
eBook - PDFMacroeconomics
Principles & Policy
- William Baumol, Alan Blinder, John Solow, , William Baumol, Alan Blinder, John Solow(Authors)
- 2019(Publication Date)
- Cengage Learning EMEA(Publisher)
Issue Revisited Copyright 2020 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 44 Part 1 Getting Acquainted with Economics Economists define efficiency as the absence of waste. An efficient economy wastes none of its available resources and produces the goods and services that people want, produces them using the least amount of resources that its technology permits, and gets them to the people who get the most value from them. Part of being efficient is being productively efficient; that is, producing the maximum amount of output possible from its resources given the available technology. To see why any point on the economy’s Production Possibilities frontier in Figure 3 (in a choice between missiles or automobiles or some combination of the two) represents a productively efficient decision, suppose for a moment that society has decided to produce 300 missiles. The Production Possibilities frontier tells us that if 300 missiles are to be pro- duced, then the maximum number of automobiles that can be made is 500,000 (point D in Figure 3). The economy is, therefore, producing efficiently only if it produces 500,000 automobiles (when it manufactures 300 missiles) rather than some smaller number of cars, such as 300,000 (as at point G). Point D is productively efficient, but point G is not, because the economy is capable of moving from G to D, thereby producing 200,000 more automobiles without giving up any missiles (or anything else). Clearly, failure to take advantage of the option of choosing point D rather than point G constitutes a wasted opportunity—an inefficiency.
eBook - PDF- Martha L. Olney(Author)
- 2011(Publication Date)
- Wiley(Publisher)
The Production Possibilities frontier (PPF) is downward-sloping, because every activity has an opportunity cost. There are trade-offs. If more of the second good is produced, less of the first good can be produced. The PPF is nonlinear. It is bowed out, or con- cave to the origin. The opportunity cost of producing more of the second good is forgone production of the first good. As more of the second good is produced, the opportunity cost rises. Figure 2.2 shows what a PPF looks like in general, when we don’t have any numbers to start from. It is downward-sloping (higher on the left, lower on the right), because every activity has an opportunity cost. Producing more of one good requires producing less of the other. It is nonlinear (not a straight line) and bowed out, concave to the origin, because of the law of increasing opportunity costs. Resources are not equally well suited to all tasks. Any point between the axes and the PPF (such as point A in Figure 2.2) or on the PPF (such as point B) represents a combination of output that can be produced with the available resources; economists say these combinations are attainable. Any point on the PPF (such as B) is a combination of output that uses all the available resources; economists call those combinations efficient. Any point inside but not on the PPF (between the axes and the PPF, such as A) represents a combination of output that is not using all the available resources; those combinations are called inefficient. Any combination of output outside of the PPF (above or to the right, such as C) represents a combination of output that cannot be produced with the available resources; economists call those points unattainable. Economic Growth 27 TRY 5. Draw a PPF. Label these four points on your graph: a. A combination of output that is attainable b. A combination of output that is efficient c. A combination of output that is inefficient d. A combination of output that is unattainable 6.
- Jürgen Plöhn, George Chobanov(Authors)
- 2017(Publication Date)
- Peter Lang Group(Publisher)
The third section argues that economic policy can be introduced in the model as an endogenous variable, one of the claims that was made after the economic crisis. In the fourth section we leave the neoclassical world and introduce concepts from New Institutional Economics. Section five concludes. Production Possibility Frontier 13 2. The ‘Standard’ Production Possibility Frontier Let us assume a neoclassical world with perfectly competitive markets, no in- formation asymmetries and rational individuals. Students get acquainted with these assumptions within their first weeks in economics courses. In a competitive economy the PPF shows for given input factors and for a given technology the maximum output in a two-dimensional diagram. Typically the goods modeled are consumer goods and capital goods. To frame it differently, the PPF is the boundary of an economy’s production set in the net output space, consisting of feasible net output vectors. This is a PPF as found in many textbooks and it is neoclassical in nature. We call it for simplicity a ‘standard’ PPF. In order to provide an example we assume that an economy produces only two goods, machines [M] and software support services [S]. While M is a manu- factured good, S is a service good. It is reasonable to argue that S is particularly labor-intensive, while M is particularly capital-intensive. Figure 1 depicts such a graphical model, where the number of machines is on the x-axis and the amount of produced software support on the y-axis. Vector (A,0) represents a situation in which with a fixed state of technology and resources the economy produces only machines and vector (0,B) represents the maximal amount of services when no machines are produced. The PPF is a concave function with respect to its origin. This shape indicates that if we move along the PPF from (0,B) to (A,0) opportunity costs between the two outputs change. All (M,S) combinations on the PPF represent efficient output combina- tions.
eBook - PDFEconomics For Dummies
Book + Chapter Quizzes Online
- Sean Masaki Flynn(Author)
- 2023(Publication Date)
- For Dummies(Publisher)
You could pro- duce such an output combination if you had more workers, but you’re limited to five workers. Imagine that instead of allocating labor by worker, you allocate it by time. The five workers each work for one day, so you have 5 worker-days of labor to allocate. You can now allocate, for instance, 3.2 worker-days to apple picking and 1.8 worker- days to orange picking. This arrangement allows you to fill in the graph and draw a line connecting the six points corresponding to the output combinations you get when allocating labor by worker, one worker at a time. The line passing through the six points is called the Production Possibilities fron- tier, or PPF, because it divides the area of the graph into two parts. The combina- tions of output that are possible to produce given your limited supply of labor are under the line in the shaded area, and those that are not possible to produce are above it in the unshaded area. In this way, the PPF graph captures the effect of scarce resources on production. Some output combinations just aren’t producible, given the limited supply of labor. The PPF is a simplification of the real world, derived by allocating one input between just two outputs. The real world is more complicated, of course, with TABLE 3-2 Outputs of Apples and Oranges as the Labor Allocation Changes Combo 1 Combo 2 Combo 3 Combo 4 Combo 5 Combo 6 Workers picking oranges 0 1 2 3 4 5 Workers picking apples 5 4 3 2 1 0 Output of oranges 0 300 500 620 680 700 Output of apples 700 680 620 500 300 0 44 PART 1 Economics: The Science of How People Deal with Scarcity several resources allocated among the different outputs. But the principles of lim- ited resources and diminishing returns that show up so clearly on the PPF graph also apply to the much greater variety of inputs and outputs in the real world. Interpreting the shape of the graph The bowed-out curvature of the PPF graph illustrates the effects of diminishing returns.
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