If the production possibilities curve is a straight line: A) the two products will sell at the same market prices. Issues in Labor Markets: Unions, Discrimination, Immigration, Introduction to Issues in Labor Markets: Unions, Discrimination, Immigration, Chapter 16. 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”). This is because its slope is given by the relative prices of the two goods. 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 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. B) economic resources are perfectly shiftable between the production of the two products. Figure 2 illustrates these ideas using a production possibilities frontier between healthcare and education. 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. The curve is a downward-sloping straight line, indicating that there is a linear, negative relationship between the production of the two goods. C) the two products are equally important to consumers. A production possibility frontier is a straight line when there are constant opportunity costs down the slope. 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. With trade, goods are produced where the opportunity cost is lowest, so total production increases, benefiting both trading parties. Allocative efficiency? 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. the two products are equally important to consumers. In everyday usage, efficiency refers to lack of waste. But it would not have any resources to produce education. Both show a tradeoff between having more of one good but less of the other. In Figure 1, healthcare is shown on the vertical axis and education is shown on the horizontal axis. In contrast, the PPF has a curved shape because of the law of the diminishing returns. What is the shape of production possibility curve: (a) Concave to the origin ... Straight line (d) None of the above. All choices on the PPF in Figure 2, including A, B, C, D, and F, display productive efficiency. While every society must choose how much of each good it should produce, it does not need to produce every single good it consumes. Because the PPF is downward sloping from left to right, the only way society can obtain more education is by giving up some healthcare. Straight-line PPFs show constant The PPF curve can be for a single company or producer, or for the economy as a whole. Inefficient and Infeasible Points. If the society were to allocate all of its resources to healthcare, it could produce at point A. Allocative efficiency requires productive efficiency, because it pertains to choices along the production possibilities frontier. Explain why production possibility curve is concave? 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. The opposite is true for the U.S. 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). Question: A Production Possibilities Curve That Is A Straight Line … Why is a production possibilities frontier typically drawn as a curve, rather than a straight line? Over time, a growing economy will tend to shift the PPF outwards. Q12) In general, if a production possibilities curve is concave rather than a straight line, it shows: Decreasing opportunity cost of specializing in production. At its most basic, allocative efficiency means producers supply the quantity of each product that consumers demand. 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. Monopoly and Antitrust Policy, Introduction to Monopoly and Antitrust Policy, Chapter 12. Suppose society has chosen to operate at point B, and it is considering producing more 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. 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. Monopolistic Competition and Oligopoly, Introduction to Monopolistic Competition and Oligopoly, Chapter 11. 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. The opportunity cost would be the healthcare society has to give up. Answer link. As a result, the curve cannot be a straight line. Explain how production possibilities curves show efficiency growth and cost? Output mixes that had more healthcare (and less education) would have a steeper ray, while those with more education (and less healthcare) would have a flatter ray. When you think of improvements in healthcare, you can think of longer life expectancies, lower levels of infant mortality, and fewer outbreaks of disease. What does a production possibilities frontier illustrate? If Brazil devoted all of its resources to producing wheat, it would be producing at point A. If the production possibilities curve is a straight line then the A opportunity | Course Hero. 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. Only one of the productively efficient choices will be the allocatively efficient choice for society as a whole. Both show the opportunity cost graphically as the slope of the constraint (budget or PPF). There are more similarities than differences between individual choice and social choice. People are having cosmetic surgery on every part of their bodies, but no high school or college education exists. Conversely, the U.S. can produce a lot of wheat per acre, but not much sugar cane. Reduced resource availability. For example, children are seeing a doctor every day, whether they are sick or not, but not attending school. 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). A movement along the curve represents a transfer of labor resources out of one industry and into another such that all labor remains employed. The reverse is also true; the U.S. has a lower opportunity cost of producing wheat than Brazil. 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. 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. An inefficient machine operates at high cost, while an efficient machine operates at lower cost, because it is not wasting energy or materials. See all questions in Production–possibility frontier.  the goods must make use of inputs in similar proportions. However, the production possibilities frontier for healthcare and education was drawn as a curved line. Just as with Alphonso’s budget constraint, the opportunity cost is shown by the slope of the production possibilities frontier. Different points of PPF denote alternative combination of two commodities that the country can choose to produce. b. Suppose a society desires two products, healthcare and education. As a firm moves from any one of these choices to any other, either healthcare increases and education decreases or vice versa. 31. Society can choose any combination of the two goods on or inside the PPF. 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. An inefficient organization operates with long delays and high costs, while an efficient organization meets schedules, is focused, and performs within budget. The reason for downward shape of production possibility curve is: (a) Increasing opportunity cost (b) Decreasing opportunity cost On the other hand, if a large number of resources are already committed to education, then committing additional resources will bring relatively smaller gains. However, economics can point out that some choices are unambiguously better than others. Answer. Increasing opportunity cost of specializing in production. What is productive efficiency? If the production possibility curve for a two-good economy is a straight line, then? The specific choice along a production possibilities frontier that reflects the mix of goods society prefers is the choice with allocative efficiency. But, opportunity cost usually will vary depending on the start and end points. why is PPC straight line Production possibility curve production possibility frontier in hindi#OnetoOneClasses #PPC #Microeconomics The law of diminishing returns holds that as increments of additional resources are devoted to producing something, the marginal increase in output will become smaller and smaller. Suppose it considers moving from point B to point C. What would the opportunity cost be for the additional education? In contrast, the PPF has a curved shape because of the law of the diminishing returns. 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. This problem has been solved! It's impossible to draw a straight line through those 3 points. 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. Explain why societies cannot make a choice above their production possibilities frontier and should not make a choice below it. It also suffered many human casualties, both soldiers and civilians. Outside the PPF curve is impossible. Why does the PPF have a different shape? When government spends a certain amount more on reducing crime, for example, the original gains in reducing crime could be relatively large. How to determine what a society desires can be a controversial question, and is usually discussed in political science, sociology, and philosophy classes as well as in economics. 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. The slope of the PPF gives the opportunity cost of producing an additional unit of wheat. 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. In the context of a PPF, opportunity cost is directly related to the shape of the curve (see below). This situation would be extreme and even ridiculous. There are two major differences between a budget constraint and a production possibilities frontier. Draw Farmer Brown's production possibilities frontier (PPF), corn on horizontal axis and tobacco on vertical … How does a production possibility curve illustrates the trade off of supply and demand? 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. In effect, the production possibilities frontier plays the same role for society as the budget constraint plays for Alphonso. As you read this section, focus on the similarities. equal quantities of the two goods will be produced at each possible point on the curve. 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. the two goods are equally important to consumers. This section of the chapter will explain the constraints faced by society, using a model called the production possibilities frontier (PPF). Now consider the other end, at the lower right, of the production possibilities frontier. Every economy faces two situations in which it may be able to expand consumption of all goods. 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. The budget constraints presented earlier in this chapter, showing individual choices about what quantities of goods to consume, were all straight lines. A straight-line production possibilities curve has a constant opportunity cost. If the production possibilities curve is a straight line, the two goods will sell at the same market prices. D Straight- line production possibilities curve. A production possibilities curve that is a straight line represents the case of constant costs. Inside the PPF curve is inefficient or involves unemployed workers. There are no specific numbers because we do not know the exact amount of resources this imaginary economy has, nor do we know how many resources it takes to produce healthcare and how many resources it takes to produce education. Neither skis nor snowboards is an independent or a dependent variable in the production possibilities model; we can assign either one to … In other words, the PPF would rotate clockwise around the horizontal intercept. How did the war affect Germany’s production possibilities curve? During the Second World War, Germany’s factories were decimated. 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. Greater resource availability. An additional reason for the lack of numbers is that there is no single way to measure levels of education and healthcare. The shape of the PPF is typically curved outward, rather than straight. This is because its slope is given by the relative prices of the two goods. 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. But it does not have enough resources to produce outside the PPF. In this way, the law of diminishing returns produces the outward-bending shape of the production possibilities frontier. economic resources are perfectly substitutable between the production of the two goods. Production possibilities curve concave to the origin. If the shape of the PPF curve is a straight-line, the opportunity cost is constant as production of different goods is changing. 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. 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. The curvature of the PPF is likely to differ by country, which results in different countries having comparative advantage in different goods. Answer: (a) Concave to the origin. 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. By moving from point A to point B Brazil would give up a relatively small quantity in wheat production to obtain a large production in sugar cane. E Upward-sloping production possibilities curve. No. 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 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. 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. 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. Sort by: Top Voted. 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. The straight downward-sloping line is the production possibility frontier. 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. The gains to education from adding these last few resources to education are very small. It describes all possible quantity combinations of wine and cheese that can be achieved by the U.S. economy. The PPF is called a frontier or a boundary line because any point on the curve represents full employment of resources. Globalization and Protectionism, Introduction to Globalization and Protectionism, 34.1 Protectionism: An Indirect Subsidy from Consumers to Producers, 34.2 International Trade and Its Effects on Jobs, Wages, and Working Conditions, 34.3 Arguments in Support of Restricting Imports, 34.4 How Trade Policy Is Enacted: Globally, Regionally, and Nationally, Appendix A: The Use of Mathematics in Principles of Economics. What are the similarities between a consumer’s budget constraint and society’s production possibilities frontier, not just graphically but analytically? ª The algebraic formula for a production possibilities frontier (PPF) shows the opportunity cost of one good in terms of the other. This is known as opportunity cost. production possibility curve is a straight line. When The Possibility Curve Is A Straight Line Does The Order Of Which Fields Brown Is Switching Matter? 1.1 What Is Economics, and Why Is It Important? This observation is based on the concept of efficiency. concave towards the origin. 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. The law of increasing opportunity cost is reflected in the shape of the A. 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. This is known as opportunity cost. Practice: Interpreting graphs of the production possibilities curve (PPC) Practice: Calculating opportunity costs from a production possibilities curve (PPC) Next lesson. If the production possibilities curve is a straight line: economic resources are perfectly substitutable between the production of the two products. Choices outside the PPF are unattainable and choices inside the PPF are wasteful. The study of economics does not presume to tell a society what choice it should make along its production possibilities frontier. The second is the absence of specific numbers on the axes of the PPF. Due to its climatic conditions, Brazil can produce a lot of sugar cane per acre but not much wheat. This would make the PPF steeper, corresponding to an increase in the opportunity cost of education, since resources devoted to education would now mean forgoing a greater quantity of healthcare. 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. By now you might be saying, “Hey, this PPF is sounding like the budget constraint.” If so, read the following Clear It Up feature. 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. equal quantities of the two products will be produced at each possible point on the curve. For example, production could take place at point D, with 9 million units of food and 3 million units of cloth being produced. 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. The first is the fact that the budget constraint is a straight line. Combinations of output that are inside the production possibilities … Study Resources. 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. Main Menu. Because of the improvement in technology, the vertical intercept of the PPF would be at a higher level of healthcare. Could a nation be producing in a way that is allocatively efficient, but productively inefficient? 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. To understand why the PPF is curved, start by considering point A at the top left-hand side of the PPF. Increasing opportunity cost. High tech investment may even bend the curve the other way and have decreasing cost, but not forever. However, putting those marginal dollars into education, which is completely without resources at point A, can produce relatively large gains. Production cannot take place beyond the curve. 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. 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