Production Possibility Curves

10 Key excerpts on "Production Possibility Curves"

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  eBook - PDF

  Agricultural Production Economics in 2 Vols.

  • Kumar, K Nirmal Ravi(Authors)
  • 2021(Publication Date)
  • Daya Publishing House

    (Publisher)

  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. In dealing with two products, PPC represents how much of the production of one product must be sacrificed for a given increase in production of the other. So, any point on the PPC implies the efficient use of given level of resources in producing the two products under consideration. If the farmer is not producing the quantities of the products on the PPC (say, below the PPC), it indicates the resources are being managed inefficiently and the production of farmer will dwindle. So, PPC is a hypothetical representation of the quantities of two different products that can be obtained by shifting resources from the production of one product to the production of the other. This curve, therefore, is used to describe a farmer’s choice between two different products. A. Assumptions The following are the assumptions formulated under PPC analysis: This ebook is exclusively for this university only. Cannot be resold/distributed. The quantities of resources and the technology available with the farmer are fixed. The farmer can produce only two products with the available scarce resources. However, considering only two products for analysis is a case of theoretical simplification and convenient for graphical analysis. However, if one product or good is of primary interest, all other goods can be represented as a composite good and we can draw their production possibilities. The resources are fully (efficiently) employed. The resources are not equally efficient in production of two products. Thus, if resources are transferred from production of one product to another, the marginal opportunity cost changes and it determines the shape of the PPC.

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  eBook - PDF

  Microeconomics

  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.

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  eBook - ePub

  Understanding Economics

  • Harlan M. Smith(Author)
  • 2016(Publication Date)
  • Routledge

    (Publisher)

  Most economics principles textbooks display a production possibilities curve early in the book, showing the maximum amount of some one (conglomerate) product (such as food) that it would be possible for the economy to produce, given its resource base and technology, along with the maximum possible production of another product, again using all available resources, and all intermediate possibilities that divide the resources between the two (conglomerate) products. As stated, the concept is somewhat fanciful, because it assumes that it would be possible to have the entire economy use all its resources and confine itself to either such product.

  There are several important concepts that are or can be explained with the aid of the production possibilities frontier. They can be as well or better explained by envisaging a more realistic situation, starting from an existent allocation of resources among different lines of production, a sort of multidimensional production possibilities concept instead of a two-dimensional frontier, and with attention to the concept of using all of an economy’s resources.

  An economy is said to be technically efficient if its production lies somewhere on the production possibilities frontier. The frontier shows the available choices of efficient combinations of products, hence the opportunity costs and possible marginal trade-offs at any point on the frontier. Think now not of end points on a two-dimensional curve, but of producing some technically efficient real combination of outputs, represented by a set of points in n-dimensions. One can think then about various possible trade-offs; increasing any one output will be at the expense of some other output or outputs. How much of any one thing would have to be sacrificed to increase the output of something else is the opportunity cost (the significant economic cost) of that increased output in terms of the specific alternative sacrificed at that particular margin. There are thus numerous possible trade-offs at any existent margin, so expansion of one output has a range of specifiable opportunity costs.

  In connection with the production possibilities curve or elsewhere, textbooks usually introduce the principle of increasing opportunity costs. The more one increases the output of one thing at the expense of others, the higher the opportunity cost of the first.

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  eBook - ePub

  Technical Change, Relative Prices, and Environmental Resource Evaluation

  • V. Kerry Smith(Author)
  • 2018(Publication Date)
  • Routledge

    (Publisher)

  chapter three The Supply Side: Technically Feasible Production Possibilities In the absence of product market imperfections, the technical options available to a society can be conveniently summarized by a production transformation curve. In this chapter, the production transformation curve is defined and derived graphically as well as algebraically. Moreover, the effect of environmental resources upon the shape of the contour is discussed. Neutral and non-neutral, autonomous technical innovations in terms of products are defined. The elasticity of transformation and constant elasticity frontier derived by Powell and Gruen (1968) are discussed. A generalization of the elasticity and the locus are presented, and technical change is discussed in the more general framework. A STATEMENT OF THE COMMUNITY’S OPTIONS: A TRANSFORMATION CURVE In the theory of international trade, as well as in the theory of economic exchange, it is essential to define in a consistent manner the opportunity costs of a community’s choices of goods and services. The principal analytical tool for such a definition is the production possibility, or transformation, curve. 1 A production function has been defined as the economist’s summary of a complex, underlying productive technology for a single good. The transformation curve summarizes the productive technology for two goods with a given resource base, considering all feasible efficient allocations of these resources. It maps the alternative combinations of all the goods and services a community may elect to have, given its resources and state of technology. It does not, however, rely (except for definition of the relevant set of goods and services) upon this preference pattern. Assuming a given resource base and unchanging technology, it is technical data

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  eBook - ePub

  Economics For Dummies

  Book + Chapter Quizzes Online

  • Sean Masaki Flynn(Author)
  • 2023(Publication Date)
  • For Dummies

    (Publisher)

  You may also want to reassign a second worker, and perhaps a third or a fourth. But you don’t want to reassign all the workers because diminishing returns applies just as much to picking apples as to picking oranges. Each additional worker assigned to picking apples produces less than the previous worker picking apples. At some point, moving additional workers from picking oranges to picking apples no longer benefits you. When that happens, you will have reached what economists refer to as an optimal allocation of your labor resource. As soon as you’ve found this sweet spot, you have no further incentive to move workers from picking one fruit to picking the other because no additional moving of workers will increase total fruit picking. At this point, you’ve maximized your fruit-picking potential.

  Graphing your production possibilities

  Economists have a handy graph called the production possibilities frontier (PPF) that lets you visualize the effect of diminishing returns and view the trade-offs you make when you reallocate inputs from producing one thing to producing another. The production possibilities frontier, which is sometimes referred to as the production possibilities curve, also shows how limited resources constrain your ability to produce output. Figure 3-1 shows a PPF graph that corresponds to the data in Table 3-2 .

  © John Wiley & Sons, Inc.

  FIGURE 3-1: The production possibilities frontier (PPF) for the data in Table 3-2 .

  Table 3-2

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  eBook - PDF

  Economics For Dummies

  Book + Chapter Quizzes Online

  • Sean Masaki Flynn(Author)
  • 2023(Publication Date)
  • For Dummies

    (Publisher)

  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. In Figure 3-1, the changing slope as you move along the frontier shows that the trade-off between apple production and orange production depends on where you start. If you’re at Point A, where you’re allocating all your resources to the production of apples, then you can, by reallocating resources, produce a lot more oranges at the cost of giving up only a few apples. But if you start at Point D, where you’re already producing a lot of oranges, you have to give up a lot of apples to get just a few more oranges. In economic jargon, the changing slope of the PPF in the face of diminishing returns is due to the fact that the opportunity cost of production varies, depending on your current allocation of resources. (Check out Chapter 2 for more on oppor- tunity cost, which equals the value of the best option you didn’t choose.) Suppose you’re already producing a lot of apples. In that case, the opportunity cost of devoting even more labor to apple production is high because you’re giving up a lot of potential orange production. On the other hand, the opportunity cost of devoting that labor to orange production is low because you have to give up pro- ducing only a few apples. Clearly, you should devote the labor to picking the fruit with lower opportunity cost because, in this example, both fruits bring the same benefit: $1 per fruit sold. Gauging efficiency The PPF is handy because any points that lie on the PPF itself (on the frontier) clearly show the output combinations you get when you’re productively efficient, or wasting none of your resources.

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  eBook - PDF

  An 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.

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  eBook - ePub

  A Primer on Microeconomics, Second Edition, Volume I

  Fundamentals of Exchange

  • Thomas M. Beveridge(Author)
  • 2018(Publication Date)
  • Business Expert Press

    (Publisher)

  We can demonstrate this conclusion quite simply. Although increasing costs are the real-world norm, from now on, we will assume that producers face constant opportunity costs, because this will allow us to draw simpler straight-line PPFs.

  Note : If we have constant costs, then marginal cost is constant, rather than increasing as output increases.

  Consider the slope of PPF1 and its endpoints. If we choose to produce only corn, then we can produce 30 units of corn, but we must give up the 90 units of soybeans that otherwise could have been produced. Each unit of corn “costs” three units of soybeans. Now consider the slope of PPF2. If we choose to produce only corn, then we can produce 45 units of corn, but we must give up the 90 units of soybeans. Each unit of corn now “costs” only two units of soybeans. The opportunity cost of corn has decreased. Verify that the opportunity cost of a unit of soybeans has increased from one-third of a unit of corn to one-half of a unit of corn. Recall that the opportunity cost of each good is the reciprocal of the opportunity cost of the other good.

  THINK IT THROUGH: What happened to medieval Europe’s PPF during the Black Death? What was the effect on American production of the introduction of the Internet in the 1990s? Finally, in 1945, the Manhattan Project developed the atomic bomb. In terms of “guns” (military capability) and “butter,” (consumer goods) how did the Allies’ PPF change? Show each of these cases with a PPF diagram.

  Using the PPF Diagram

  We have now developed an understanding of the general meaning of the PPF and the assumptions behind it. But how can it be used? The analysis can be used in several ways—for instance, when thinking about the consequences of choice , different concepts of efficiency, the distinction between microeconomics and macroeconomics, and the basis for trade.

  The PPF diagram illustrates choice. Along the frontier, where we have full employment of resources, if we choose to produce more guns, the consequence is that we must settle for less butter. The slope of the frontier shows the rate of trade-off and reminds us that “there’s no such thing as a free lunch.”

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  eBook - PDF

  Farm Managerial Economics

  • Kumar, K Nirmal Ravi(Authors)
  • 2021(Publication Date)
  • Daya Publishing House

    (Publisher)

  With the reallocation of resources, the opportunity cost of Product A production will rise. This reallocation should continue until the following is true: MRPS AB = P A /P B (ΔB/ΔA) = P A /P B This ebook is exclusively for this university only. Cannot be resold/distributed. The above explanation is so useful, as it can be generalized to the case of more than two products produced by the farmer in his production programme. This is because, when a farmer produces more than two products, it is difficult to illustrate PPCs and iso-revenue lines on a two-dimensional graph. So, the above Equation 2.14 can be used to generalize to any number of products. Suppose, the farmer produces ‘N’ products in a production programme, with MPPs viz., MPP A , MPP B , MPP C , - - - -, MPP N and product prices P A , P B , P C , …, P N . Then, for any level of resources usage, the OPC of all of these products will always satisfy: MPP A /P A = MPP B /P B = MPP C /P C = –– = MPP N /P N Equation 2.15 As per the above Equation 2.15, when a farmer produces more than two products, the OPC of products mix can be obtained, when the extra output (MPP) derived from a product per rupee of that product will be equal to the extra output (MPP) derived from any other product per rupee of that product. B. PPC – Iso-revenue Line Approach The earlier discussion on PPC and iso-revenue line reveals two important aspects viz., the PPC infers ‘what combinations of products the farmer is willing to produce’ and the iso-revenue line guides the farmer, ‘what quantities of products the farmer will sell’, so as to maximize the profits in the production programme. So, when the PPC and the iso-revenue line are combined, we find the quantities of each product the farmer is both willing and able to sell for the given level of resources. So, the PPC and iso-revenue line helps the farmer to find out the optimum combination of products, where he can maximize the profits.

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  Macroeconomics

  Principles & Policy

  • William Baumol, Alan Blinder, John Solow, , William Baumol, Alan Blinder, John Solow(Authors)
  • 2019(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  3-3 SCARCITY AND CHOICE FOR THE ENTIRE SOCIETY Like an individual firm, the entire economy is also constrained by its limited resources and technology. If the public wants more aircraft and tanks, it will have to give up some boats and automobiles. If it wants to build more factories and stores, it will have to build fewer homes and sports arenas. In general: The position and shape of the production possibilities frontier that constrains society’s choices are determined by the economy’s physical resources, its skills and technology, its willingness to work, and how much it has devoted in the past to the construction of factories, research, and innovation. Because so many nations have long debated whether to reduce or augment military spending, let us exemplify the nature of society’s choices by deciding between military might (represented by missiles) and civilian consumption (represented by automobiles). Just like a single firm, the economy as a whole faces a production possibilities frontier for missiles and autos, determined by its technology and the available resources of land, labor, capital, and raw materials. This production possibilities frontier may look like curve BC in Figure 3. If most workers are employed in auto plants, car production will be large, but the output of missiles will be small. If the economy’s decision makers choose to, it can transfer resources out of auto manufacturing and alter the output mix toward more missiles (the move from D to E). However, something is likely to be lost in the process because physical resources are specialized. The fabric used to make car seats will not help much in missile production. Engineers who are good at designing automobile engines may not be as good at designing rocket propulsion systems. The principle of increasing costs strongly suggests that the production possibilities frontier curves downward toward the axes.

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