When countries engage in trade, they specialize in the production of the goods that they have comparative advantage in, and trade part of that production for goods they do not have comparative advantage in. Suppose it considers moving from point B to point C. What would the opportunity cost be for the additional education? 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. A straight-line production possibilities curve has a constant opportunity cost. 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. Increasing opportunity cost of specializing in production. At point A, all available resources are devoted to healthcare and none are left for education. Now consider the other end, at the lower right, of the production possibilities frontier. In effect, the production possibilities frontier plays the same role for society as the budget constraint plays for Alphonso. Answer: (a) Concave to the origin. 16) Explain why societies cannot make a choice above their production possibilities frontier and should not make a choice below it The production possibility frontier (PPF) is used to illustrate the different combination of two good or services produced with all the resources available. For example, children are seeing a doctor every day, whether they are sick or not, but not attending school. For example, production is not possible at point U. Most important, the production possibilities frontier clearly shows the tradeoff between healthcare and education. Production Possibilities Frontier Graph Sometimes, the production possibility frontier does not look like a curve—instead, it’s linear, meaning that it’s simply a straight line. equal quantities of the two products will be produced at each possible point on the curve. Positive Externalities and Public Goods, Introduction to Positive Externalities and Public Goods, 13.1 Why the Private Sector Under Invests in Innovation, 13.2 How Governments Can Encourage Innovation, Chapter 14. What are the similarities between a consumer’s budget constraint and society’s production possibilities frontier, not just graphically but analytically? Issues in Labor Markets: Unions, Discrimination, Immigration, Introduction to Issues in Labor Markets: Unions, Discrimination, Immigration, Chapter 16. The study of economics does not presume to tell a society what choice it should make along its production possibilities frontier. How does a production possibility curve illustrates the trade off of supply and demand? Allocative efficiency means that the particular mix of goods a society produces represents the combination that society most desires. the two goods are equally important to consumers.  opportunity costs increase as production of one good rises. If Brazil devoted all of its resources to producing wheat, it would be producing at point A. equal quantities of the two goods will be produced at each possible point on the curve. Often how much of a good a country decides to produce depends on how expensive it is to produce it versus buying it from a different country. See all questions in Production–possibility frontier. 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. Study Resources. Main Menu. Figure 2 illustrates these ideas using a production possibilities frontier between healthcare and education. What is the shape of production possibility curve: (a) Concave to the origin ... Straight line (d) None of the above. The first is the fact that the budget constraint is a straight line. Countries tend to have different opportunity costs of producing a specific good, either because of different climates, geography, technology or skills. In the first case, a society may discover that it has been using its resources inefficiently, in which case by improving efficiency and producing on the production possibilities frontier, it can have more of all goods (or at least more of some and less of none). Question 35. By now you might be saying, “Hey, this PPF is sounding like the budget constraint.” If so, read the following Clear It Up feature. Sort by: Top Voted. It also suffered many human casualties, both soldiers and civilians. 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. The PPF is the collection of all output combinations possible, that are efficient. All choices on the PPF in Figure 2, including A, B, C, D, and F, display productive efficiency. The shape of the PPF is typically curved outward, rather than straight. The reason for these straight lines was that the slope of the budget constraint was determined by relative prices of the two goods in the consumption budget constraint. At its most basic, allocative efficiency means producers supply the quantity of each product that consumers demand. But improvements in productive efficiency take time to discover and implement, and economic growth happens only gradually. Poverty and Economic Inequality, Introduction to Poverty and Economic Inequality, 14.4 Income Inequality: Measurement and Causes, 14.5 Government Policies to Reduce Income Inequality, Chapter 15. 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. The straight downward-sloping line is the production possibility frontier. In the context of a PPF, opportunity cost is directly related to the shape of the curve (see below). ª The algebraic formula for a production possibilities frontier (PPF) shows the opportunity cost of one good in terms of the other. … 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. Suppose society has chosen to operate at point B, and it is considering producing more education. Imagine that society starts at choice D, which is devoting nearly all resources to education and very few to healthcare, and moves to point F, which is devoting all spending to education and none to healthcare. This is the opportunity cost of the additional education. Comparative advantage and the terms of trade . 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. A production possibility frontier is a straight line when there are constant opportunity costs down the slope. It is clear that productive inefficiency is a waste since resources are being used in a way that produces less goods and services than a nation is capable of. Different points of PPF denote alternative combination of two commodities that the country can choose to produce. The curvature of the PPF is likely to differ by country, which results in different countries having comparative advantage in different goods. D Straight- line production possibilities curve. Inside the PPF curve is inefficient or involves unemployed workers. concave towards the origin. If the production possibilities curve is a straight line: A) the two products will sell at the same market prices. The particular mix of goods and services being produced—that is, the specific combination of healthcare and education chosen along the production possibilities frontier—can be shown as a ray (line) from the origin to a specific point on the PPF. 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. The International Trade and Capital Flows, Introduction to the International Trade and Capital Flows, 23.2 Trade Balances in Historical and International Context, 23.3 Trade Balances and Flows of Financial Capital, 23.4 The National Saving and Investment Identity, 23.5 The Pros and Cons of Trade Deficits and Surpluses, 23.6 The Difference between Level of Trade and the Trade Balance, Chapter 24. However, putting those marginal dollars into education, which is completely without resources at point A, can produce relatively large gains. The law of increasing opportunity cost is reflected in the shape of the A. For example, point R is productively inefficient because it is possible at choice C to have more of both goods: education on the horizontal axis is higher at point C than point R (E2 is greater than E1), and healthcare on the vertical axis is also higher at point C than point R (H2 is great than H1). This situation is illustrated by the production possibilities frontier in Figure 1. Total production can increase if countries specialize in the goods they have comparative advantage in and trade some of their production for the remaining goods. Practice: Interpreting graphs of the production possibilities curve (PPC) Practice: Calculating opportunity costs from a production possibilities curve (PPC) Next lesson. The straight-line production possibilities curve introduced in the text 1.1 What Is Economics, and Why Is It Important? As it does, the production possibilities frontier for a society will tend to shift outward and society will be able to afford more of all goods. b. Choices outside the PPF are unattainable and choices inside the PPF are wasteful. Answer link. See the answer. Suppose a society desires two products, healthcare and education. But it does not have enough resources to produce outside the PPF. A movement along the curve represents a transfer of labor resources out of one industry and into another such that all labor remains employed. Because the PPF is downward sloping from left to right, the only way society can obtain more education is by giving up some healthcare. This situation would be extreme and even ridiculous. For government, this process often involves trying to identify where additional spending could do the most good and where reductions in spending would do the least harm. The lesson is not that society is likely to make an extreme choice like devoting no resources to education at point A or no resources to health at point F. Instead, the lesson is that the gains from committing additional marginal resources to education depend on how much is already being spent. A production possibilities frontier defines the set of choices society faces for the combinations of goods and services it can produce given the resources available. Only one of the productively efficient choices will be the allocatively efficient choice for society as a whole. Sep 24, 2015. However, when you think of improvements in education, you can think of accomplishments like more years of school completed, fewer high-school dropouts, and higher scores on standardized tests. If however it had devoted all of its resources to producing sugar cane instead, it would be producing a much larger amount, at point B. Allocative efficiency requires productive efficiency, because it pertains to choices along the production possibilities frontier. How did the war affect Germany’s production possibilities curve? 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. In a market-oriented economy with a democratic government, the choice will involve a mixture of decisions by individuals, firms, and government. Why does the PPF have a different shape? Due to its climatic conditions, Brazil can produce a lot of sugar cane per acre but not much wheat. This is known as opportunity cost. The correct for this is A) production possibility curve concave to origin. This problem has been solved! Monopolistic Competition and Oligopoly, Introduction to Monopolistic Competition and Oligopoly, Chapter 11. But, opportunity cost usually will vary depending on the start and end points. It describes all possible quantity combinations of wine and cheese that can be achieved by the U.S. economy. 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 second is the absence of specific numbers on the axes of the PPF. 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. Production cannot take place beyond the curve. If the production possibilities curve is a straight line: economic resources are perfectly substitutable between the production of the two products. All choices along a production possibilities frontier display productive efficiency; that is, it is impossible to use society’s resources to produce more of one good without decreasing production of the other good. With trade, goods are produced where the opportunity cost is lowest, so total production increases, benefiting both trading parties. The reason for downward shape of production possibility curve is: (a) Increasing opportunity cost (b) Decreasing opportunity cost the two products will sell at the same market prices. The budget constraints presented earlier in this chapter, showing individual choices about what quantities of goods to consume, were all straight lines. But it would not have any resources to produce education. One can easily see this with a simple observation of the extreme production points in the PPFs of the two countries. This can be illustrated by the PPFs of the two countries in Figure 3. Monopoly and Antitrust Policy, Introduction to Monopoly and Antitrust Policy, Chapter 12. At the individual and firm level, the market economy coordinates a process in which firms seek to produce goods and services in the quantity, quality, and price that people want. This observation is based on the concept of efficiency. This pattern is common enough that it has been given a name: the law of diminishing returns, which holds that as additional increments of resources are added to a certain purpose, the marginal benefit from those additional increments will decline. Whether or not we have specific numbers, conceptually we can measure the opportunity cost of additional education as society moves from point B to point C on the PPF. As we saw earlier, the curvature of a country’s PPF gives us information about the tradeoff between devoting resources to producing one good versus another. Both show the opportunity cost graphically as the slope of the constraint (budget or PPF). 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. Suppose two countries, the US and Brazil, need to decide how much they will produce of two crops: sugar cane and wheat. Increasing opportunity cost. Answer. In Figure 1, healthcare is shown on the vertical axis and education is shown on the horizontal axis. But additional increases typically cause relatively smaller reductions in crime, and paying for enough police and security to reduce crime to nothing at all would be tremendously expensive. economic resources are perfectly substitutable between the production of the two goods. Explain why production possibility curve is concave? Principles of Economics by Rice University is licensed under a Creative Commons Attribution 4.0 International License, except where otherwise noted. 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. Q12) In general, if a production possibilities curve is concave rather than a straight line, it shows: Decreasing opportunity cost of specializing in production. The gains to education from adding these last few resources to education are very small. 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. For this reason, the shape of the PPF from A to B is relatively flat, representing a relatively small drop-off in health and a relatively large gain in education. 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. In contrast, the PPF has a curved shape because of the law of the diminishing returns. 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. Conversely, the U.S. can produce a lot of wheat per acre, but not much sugar cane. In everyday usage, efficiency refers to lack of waste. An inefficient machine operates at high cost, while an efficient machine operates at lower cost, because it is not wasting energy or materials. If the society were to allocate all of its resources to healthcare, it could produce at point A. 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. To understand why the PPF is curved, start by considering point A at the top left-hand side of the PPF. As a firm moves from any one of these choices to any other, either healthcare increases and education decreases or vice versa. People are having cosmetic surgery on every part of their bodies, but no high school or college education exists. An inefficient organization operates with long delays and high costs, while an efficient organization meets schedules, is focused, and performs within budget. 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. 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. Production possibilities curve concave to the origin. 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. The specific choice along a production possibilities frontier that reflects the mix of goods society prefers is the choice with allocative efficiency. Reduced resource availability. Macroeconomic Policy Around the World, Introduction to Macroeconomic Policy around the World, 32.1 The Diversity of Countries and Economies across the World, 32.2 Improving Countries’ Standards of Living, 32.3 Causes of Unemployment around the World, 32.4 Causes of Inflation in Various Countries and Regions, 33.2 What Happens When a Country Has an Absolute Advantage in All Goods, 33.3 Intra-industry Trade between Similar Economies, 33.4 The Benefits of Reducing Barriers to International Trade, Chapter 34. If it were to allocate all of its resources to education, it could produce at point F. Alternatively, the society could choose to produce any combination of healthcare and education shown on the production possibilities frontier. In other words, the PPF would rotate clockwise around the horizontal intercept. While every society must choose how much of each good it should produce, it does not need to produce every single good it consumes. This section of the chapter will explain the constraints faced by society, using a model called the production possibilities frontier (PPF). The slope of the PPF gives the opportunity cost of producing an additional unit of wheat. There are two major differences between a budget constraint and a production possibilities frontier. For example, production could take place at point D, with 9 million units of food and 3 million units of cloth being produced. In the chapter on International Trade you will learn that countries’ differences in comparative advantage determine which goods they will choose to produce and trade. There are more similarities than differences between individual choice and social choice. The curve is a downward-sloping straight line, indicating that there is a linear, negative relationship between the production of the two goods. Combinations of output that are inside the production possibilities … Clearly, Brazil has a lower opportunity cost of producing sugar cane (in terms of wheat) than the U.S. The production possibilities frontier can illustrate two kinds of efficiency: productive efficiency and allocative efficiency. Greater resource availability. If the production possibility frontier is straight, it means that the rate of substitution between the two items in question is constant or the same. Both the budget constraint and the PPF show the constraint that each operates under. What does a production possibilities frontier illustrate? During the Second World War, Germany’s factories were decimated. Question: A Production Possibilities Curve That Is A Straight Line … Just as with Alphonso’s budget constraint, the opportunity cost is shown by the slope of the production possibilities frontier. Expert Answer . Every economy faces two situations in which it may be able to expand consumption of all goods. The first is the fact that the budget constraint is a straight line. If on the one hand, very few resources are currently committed to education, then an increase in resources used can bring relatively large gains.  the goods must make use of inputs in similar proportions. An additional reason for the lack of numbers is that there is no single way to measure levels of education and healthcare. E Upward-sloping production possibilities curve. There are two major differences between a budget constraint and a production possibilities frontier. However, any choice inside the production possibilities frontier is productively inefficient and wasteful because it is possible to produce more of one good, the other good, or some combination of both goods. 31. B) economic resources are perfectly shiftable between the production of the two products. When you think of improvements in healthcare, you can think of longer life expectancies, lower levels of infant mortality, and fewer outbreaks of disease. Straight-line PPFs show constant If the shape of the PPF curve is a straight-line, the opportunity cost is constant as production of different goods is changing. 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”). No. If the production possibility curve for a two-good economy is a straight line, then?  opportunity costs fall as production of one good rises. Since resources are scarce, increasing... See full answer below. The Macroeconomic Perspective, Introduction to the Macroeconomic Perspective, 19.1 Measuring the Size of the Economy: Gross Domestic Product, 19.2 Adjusting Nominal Values to Real Values, 19.5 How Well GDP Measures the Well-Being of Society, 20.1 The Relatively Recent Arrival of Economic Growth, 20.2 Labor Productivity and Economic Growth, 21.1 How the Unemployment Rate is Defined and Computed, 21.3 What Causes Changes in Unemployment over the Short Run, 21.4 What Causes Changes in Unemployment over the Long Run, 22.2 How Changes in the Cost of Living are Measured, 22.3 How the U.S. and Other Countries Experience Inflation, Chapter 23. Allocative efficiency? As a result, the curve cannot be a straight line. Society can choose any combination of the two goods on or inside the PPF. production possibility curve is a straight line. Draw Farmer Brown's production possibilities frontier (PPF), corn on horizontal axis and tobacco on vertical … On the other hand, if a large number of resources are already committed to education, then committing additional resources will bring relatively smaller gains. The most important difference between the two graphs, though, is that a budget constraint is a straight line, while a production possibilities curve is typically bowed outwards, i.e. Environmental Protection and Negative Externalities, Introduction to Environmental Protection and Negative Externalities, 12.4 The Benefits and Costs of U.S. Environmental Laws, 12.6 The Tradeoff between Economic Output and Environmental Protection, Chapter 13. Inefficient and Infeasible Points. 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).