How did the war affect Germany’s production possibilities curve? Next: 2.3 Confronting Objections to the Economic Approach, Creative Commons Attribution 4.0 International License, Interpret production possibilities frontier graphs, Contrast a budget constraint and a production possibilities frontier, Explain the relationship between a production possibilities frontier and the law of diminishing returns, Contrast productive efficiency and allocative efficiency. Explanation - Opportunity cost -Opportunity cost refers to what you have to giv view the full answer. If the production possibilities curve is a straight line: economic resources are perfectly substitutable between the production of the two products. Allocative efficiency requires productive efficiency, because it pertains to choices along the production possibilities frontier. An inefficient machine operates at high cost, while an efficient machine operates at lower cost, because it is not wasting energy or materials. Its always drawn as a curve and not a straight line because there a cost involved in making a choice i.e when the quantity of one good produced is higher and the quantity of the other is low. However, the production possibilities frontier for healthcare and education was drawn as a curved line. This is the opportunity cost of the additional education. Information, Risk, and Insurance, Introduction to Information, Risk, and Insurance, 16.1 The Problem of Imperfect Information and Asymmetric Information, 17.1 How Businesses Raise Financial Capital, 17.2 How Households Supply Financial Capital, 18.1 Voter Participation and Costs of Elections, 18.3 Flaws in the Democratic System of Government, Chapter 19. In other words, the PPF would rotate clockwise around the horizontal intercept. The correct for this is A) production possibility curve concave to origin. Why does the PPF have a different shape? The Impacts of Government Borrowing, Introduction to the Impacts of Government Borrowing, 31.1 How Government Borrowing Affects Investment and the Trade Balance, 31.2 Fiscal Policy, Investment, and Economic Growth, 31.3 How Government Borrowing Affects Private Saving, Chapter 32. Sort by: Top Voted. If the production possibilities curve is a straight line, the two goods will sell at the same market prices. In contrast, the PPF has a curved shape because of the law of the diminishing returns. The curvature of the PPF is likely to differ by country, which results in different countries having comparative advantage in different goods. However, the opportunity cost lost to health will be fairly large, and thus the slope of the PPF between D and F is steep, showing a large drop in health for only a small gain in education. Choices outside the PPF are unattainable and choices inside the PPF are wasteful. If the production possibilities curve is a straight line then the A opportunity from ECON 2200 at California State University Los Angeles. For example, production could take place at point D, with 9 million units of food and 3 million units of cloth being produced. If the production possibilities curve is a straight line then the A opportunity | Course Hero. When The Possibility Curve Is A Straight Line Does The Order Of Which Fields Brown Is Switching Matter? Neither skis nor snowboards is an independent or a dependent variable in the production possibilities model; we can assign either one to … Suppose society has chosen to operate at point B, and it is considering producing more education. Issues in Labor Markets: Unions, Discrimination, Immigration, Introduction to Issues in Labor Markets: Unions, Discrimination, Immigration, Chapter 16. Diverting some resources away from A to B causes relatively little reduction in health because the last few marginal dollars going into healthcare services are not producing much additional gain in health. To understand why the PPF is curved, start by considering point A at the top left-hand side of the PPF. If Brazil devoted all of its resources to producing wheat, it would be producing at point A. For the sake of concreteness, you can imagine that in the movement from D to F, the last few doctors must become high school science teachers, the last few nurses must become school librarians rather than dispensers of vaccinations, and the last few emergency rooms are turned into kindergartens. economic resources are perfectly substitutable between the production of the two goods. If the society were to allocate all of its resources to healthcare, it could produce at point A. ª The reciprocal of the opportunity cost shows the opposite—the opportunity cost of the second good in terms of the first one. Why is allocative inefficiency also wasteful? This is known as opportunity cost. In a market-oriented economy with a democratic government, the choice will involve a mixture of decisions by individuals, firms, and government. Principles of Economics by Rice University is licensed under a Creative Commons Attribution 4.0 International License, except where otherwise noted. When government spends a certain amount more on reducing crime, for example, the original gains in reducing crime could be relatively large. This section of the chapter will explain the constraints faced by society, using a model called the production possibilities frontier (PPF). Productive efficiency means that, given the available inputs and technology, it is impossible to produce more of one good without decreasing the quantity that is produced of another good. What are the similarities between a consumer’s budget constraint and society’s production possibilities frontier, not just graphically but analytically? Now imagine that some of these resources are diverted from healthcare to education, so that the economy is at point B instead of point A. The additional education is measured by the horizontal distance between B and C. The foregone healthcare is given by the vertical distance between B and C. The slope of the PPF between B and C is (approximately) the vertical distance (the “rise”) over the horizontal distance (the “run”). It describes all possible quantity combinations of wine and cheese that can be achieved by the U.S. economy. The opportunity cost would be the healthcare society has to give up. Production cannot take place beyond the curve. At point A, all available resources are devoted to healthcare and none are left for education. Its always drawn as a curve and not a straight line because there a cost involved in making a choice i.e when the quantity of one good produced is higher and the quantity of the other is low. What is the shape of production possibility curve: (a) Concave to the origin ... Straight line (d) None of the above. Similarly, as additional resources are added to healthcare, moving from bottom to top on the vertical axis, the original gains are fairly large, but again gradually diminish. Countries tend to have different opportunity costs of producing a specific good, either because of different climates, geography, technology or skills. Because society has limited resources (e.g., labor, land, capital, raw materials) at any point in time, there is a limit to the quantities of goods and services it can produce. The law of increasing opportunity cost is reflected in the shape of the A. The Aggregate Demand/Aggregate Supply Model, Introduction to the Aggregate Demand/Aggregate Supply Model, 24.1 Macroeconomic Perspectives on Demand and Supply, 24.2 Building a Model of Aggregate Demand and Aggregate Supply, 24.5 How the AD/AS Model Incorporates Growth, Unemployment, and Inflation, 24.6 Keynes’ Law and Say’s Law in the AD/AS Model, Introduction to the Keynesian Perspective, 25.1 Aggregate Demand in Keynesian Analysis, 25.2 The Building Blocks of Keynesian Analysis, 25.4 The Keynesian Perspective on Market Forces, Introduction to the Neoclassical Perspective, 26.1 The Building Blocks of Neoclassical Analysis, 26.2 The Policy Implications of the Neoclassical Perspective, 26.3 Balancing Keynesian and Neoclassical Models, 27.2 Measuring Money: Currency, M1, and M2, Chapter 28. Figure 2 illustrates these ideas using a production possibilities frontier between healthcare and education. Allocative efficiency? However, putting those marginal dollars into education, which is completely without resources at point A, can produce relatively large gains. The second is the absence of specific numbers on the axes of the PPF. In particular, its slope gives the opportunity cost of producing one more unit of the good in the x-axis in terms of the other good (in the y-axis). 1.3 How Economists Use Theories and Models to Understand Economic Issues, 1.4 How Economies Can Be Organized: An Overview of Economic Systems, Introduction to Choice in a World of Scarcity, 2.1 How Individuals Make Choices Based on Their Budget Constraint, 2.2 The Production Possibilities Frontier and Social Choices, 2.3 Confronting Objections to the Economic Approach, 3.1 Demand, Supply, and Equilibrium in Markets for Goods and Services, 3.2 Shifts in Demand and Supply for Goods and Services, 3.3 Changes in Equilibrium Price and Quantity: The Four-Step Process, Introduction to Labor and Financial Markets, 4.1 Demand and Supply at Work in Labor Markets, 4.2 Demand and Supply in Financial Markets, 4.3 The Market System as an Efficient Mechanism for Information, 5.1 Price Elasticity of Demand and Price Elasticity of Supply, 5.2 Polar Cases of Elasticity and Constant Elasticity, 6.2 How Changes in Income and Prices Affect Consumption Choices, 6.4 Intertemporal Choices in Financial Capital Markets, Introduction to Cost and Industry Structure, 7.1 Explicit and Implicit Costs, and Accounting and Economic Profit, 7.2 The Structure of Costs in the Short Run, 7.3 The Structure of Costs in the Long Run, 8.1 Perfect Competition and Why It Matters, 8.2 How Perfectly Competitive Firms Make Output Decisions, 8.3 Entry and Exit Decisions in the Long Run, 8.4 Efficiency in Perfectly Competitive Markets, 9.1 How Monopolies Form: Barriers to Entry, 9.2 How a Profit-Maximizing Monopoly Chooses Output and Price, Chapter 10. But for both the government and the market economy in the short term, increases in production of one good typically mean offsetting decreases somewhere else in the economy. Society can choose any combination of the two goods on or inside the PPF. Q12) In general, if a production possibilities curve is concave rather than a straight line, it shows: Decreasing opportunity cost of specializing in production. It's impossible to draw a straight line through those 3 points. The curvature of the production possibilities frontier shows that as additional resources are added to education, moving from left to right along the horizontal axis, the original gains are fairly large, but gradually diminish. When a country can produce a good at a lower opportunity cost than another country, we say that this country has a comparative advantage in that good. Main Menu. Conversely, the U.S. can produce a lot of wheat per acre, but not much sugar cane. Government Budgets and Fiscal Policy, Introduction to Government Budgets and Fiscal Policy, 30.3 Federal Deficits and the National Debt, 30.4 Using Fiscal Policy to Fight Recession, Unemployment, and Inflation, 30.6 Practical Problems with Discretionary Fiscal Policy, Chapter 31. The gains to education from adding these last few resources to education are very small. But it would not have any resources to produce education. While the slope is not constant throughout the PPFs, it is quite apparent that the PPF in Brazil is much steeper than in the U.S., and therefore the opportunity cost of wheat generally higher in Brazil. For example, production is not possible at point U. With trade, goods are produced where the opportunity cost is lowest, so total production increases, benefiting both trading parties. Increasing opportunity cost. The straight downward-sloping line is the production possibility frontier. As a firm moves from any one of these choices to any other, either healthcare increases and education decreases or vice versa. B) economic resources are perfectly shiftable between the production of the two products. By the end of this section, you will be able to: Just as individuals cannot have everything they want and must instead make choices, society as a whole cannot have everything it might want, either. Exchange Rates and International Capital Flows, Introduction to Exchange Rates and International Capital Flows, 29.1 How the Foreign Exchange Market Works, 29.2 Demand and Supply Shifts in Foreign Exchange Markets, 29.3 Macroeconomic Effects of Exchange Rates, Chapter 30. There are more similarities than differences between individual choice and social choice. 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