What does the production possibilities curve illustrates relationship

Production Possibilities Curve as a model of a country's economy (video) | Khan Academy

what does the production possibilities curve illustrates relationship

How does a production possibilities curve illustrate how efficient an economy is? are variable and/or fixed and relationships between them are a lot trickier. A production possibilities curve illustrates a scarcity b market prices c from ECON The relationship between quantity supplied and price is _____ and the. The production possibility curves is a hypothetical representation of the amount of two different Figure 1, shows the two goods as consumption and investment. . There is no simple relationship, and causation can go in both directions.

And let's draw our original production possibilities curve. So I'll try to make it look pretty similar to what we had before. So that's our original production possibilities curve. Another way of thinking about it is it's showing the trade off between producing forks and spoons. You can actually think about what is the opportunity cost of producing an incremental spoon in terms of forks.

How many forks do you have to trade off because remember, there's scarcity at play. You don't have an infinite amount of metal to produce things with, an infinite amount of labor, an infinite amount of factories. But let's say Utenslandia, they are able to get some more land on which to build factories, maybe they build some more factories so capital goes up, maybe some people migrate to Utenslandia. So in that situation, you would have growth and your production possibilities curve would actually shift outward.

So here, we are showing, let me make it a little bit, we are showing a situation right over here, this is still a production possibilities curve but we're showing what happens when you have growth.

And once again, what are the drivers of growth? Well this could be the amount of land that you have goes up. The amount of capital that you have goes up.

Capital could be things like factories, it could be machinery, you could have people, more people are able to help produce the spoons or forks. You could just have better technology for producing spoons and forks. Sometimes people will even talk about entrepreneurial spirit, that people are able to figure out better ways of combining these resources so that you could produce more spoons or forks.

But let's imagine now the other scenario. While even smaller than the second plant, the third was primarily designed for snowboard production but could also produce skis. We can think of each of Ms. We assume that the factors of production and technology available to each of the plants operated by Alpine Sports are unchanged.

Suppose the first plant, Plant 1, can produce pairs of skis per month when it produces only skis. When devoted solely to snowboards, it produces snowboards per month. It can produce skis and snowboards simultaneously as well. The table in Figure 2.

These values are plotted in a production possibilities curve for Plant 1. The curve is a downward-sloping straight line, indicating that there is a linear, negative relationship between the production of the two goods.

Neither skis nor snowboards is an independent or a dependent variable in the production possibilities model; we can assign either one to the vertical or to the horizontal axis. Here, we have placed the number of pairs of skis produced per month on the vertical axis and the number of snowboards produced per month on the horizontal axis. Producing more snowboards requires shifting resources out of ski production and thus producing fewer skis.

Producing more skis requires shifting resources out of snowboard production and thus producing fewer snowboards. Because the production possibilities curve for Plant 1 is linear, we can compute the slope between any two points on the curve and get the same result.

These are also illustrated with a production possibilities curve. Notice that this curve is linear. To see this relationship more clearly, examine Figure 2. Suppose Plant 1 is producing pairs of skis and 50 snowboards per month at point B.

what does the production possibilities curve illustrates relationship

Now consider what would happen if Ms. Ryder decided to produce 1 more snowboard per month. The segment of the curve around point B is magnified in Figure 2. We can think of this as the opportunity cost of producing an additional snowboard at Plant 1. This opportunity cost equals the absolute value of the slope of the production possibilities curve.

Expanding snowboard production to 51 snowboards per month from 50 snowboards per month requires a reduction in ski production to 98 pairs of skis per month from pairs. The absolute value of the slope of a production possibilities curve measures the opportunity cost of an additional unit of the good on the horizontal axis measured in terms of the quantity of the good on the vertical axis that must be forgone.

The absolute value of the slope of any production possibilities curve equals the opportunity cost of an additional unit of the good on the horizontal axis. It is the amount of the good on the vertical axis that must be given up in order to free up the resources required to produce one more unit of the good on the horizontal axis. We will make use of this important fact as we continue our investigation of the production possibilities curve.

Each of the plants, if devoted entirely to snowboards, could produce snowboards. Plants 2 and 3, if devoted exclusively to ski production, can produce and 50 pairs of skis per month, respectively.

what does the production possibilities curve illustrates relationship

The exhibit gives the slopes of the production possibilities curves for each plant. The opportunity cost of an additional snowboard at each plant equals the absolute values of these slopes that is, the number of pairs of skis that must be given up per snowboard. The steeper the curve, the greater the opportunity cost of an additional snowboard.

Here, the opportunity cost is lowest at Plant 3 and greatest at Plant 1. The opportunity cost of an additional snowboard at each plant equals the absolute values of these slopes. More generally, the absolute value of the slope of any production possibilities curve at any point gives the opportunity cost of an additional unit of the good on the horizontal axis, measured in terms of the number of units of the good on the vertical axis that must be forgone.

The greater the absolute value of the slope of the production possibilities curve, the greater the opportunity cost will be. The plant for which the opportunity cost of an additional snowboard is greatest is the plant with the steepest production possibilities curve; the plant for which the opportunity cost is lowest is the plant with the flattest production possibilities curve. Ryder must give up half a pair of skis in that plant to produce an additional snowboard.

In Plant 2, she must give up one pair of skis to gain one more snowboard.

  • Opportunity cost and the Production Possibilities Curve
  • Opportunity Cost
  • Law of increasing cost

We have already seen that an additional snowboard requires giving up two pairs of skis in Plant 1. Comparative Advantage and the Production Possibilities Curve To construct a combined production possibilities curve for all three plants, we can begin by asking how many pairs of skis Alpine Sports could produce if it were producing only skis. To find this quantity, we add up the values at the vertical intercepts of each of the production possibilities curves in Figure 2.

These intercepts tell us the maximum number of pairs of skis each plant can produce. Plant 1 can produce pairs of skis per month, Plant 2 can produce pairs of skis at per month, and Plant 3 can produce 50 pairs. Alpine Sports can thus produce pairs of skis per month if it devotes its resources exclusively to ski production. In that case, it produces no snowboards. Now suppose the firm decides to produce snowboards. That will require shifting one of its plants out of ski production. Which one will it choose to shift?

The sensible thing for it to do is to choose the plant in which snowboards have the lowest opportunity cost—Plant 3. It has an advantage not because it can produce more snowboards than the other plants all the plants in this example are capable of producing up to snowboards per month but because it is the least productive plant for making skis. Producing a snowboard in Plant 3 requires giving up just half a pair of skis. Economists say that an economy has a comparative advantage in producing a good or service if the opportunity cost of producing that good or service is lower for that economy than for any other.

Plant 3 has a comparative advantage in snowboard production because it is the plant for which the opportunity cost of additional snowboards is lowest. To put this in terms of the production possibilities curve, Plant 3 has a comparative advantage in snowboard production the good on the horizontal axis because its production possibilities curve is the flattest of the three curves.

Because the production possibilities curve for Plant 1 is linear, we can compute the slope between any two points on the curve and get the same result. These are also illustrated with a production possibilities curve.

Notice that this curve is linear. To see this relationship more clearly, examine Figure 2. Suppose Plant 1 is producing pairs of skis and 50 snowboards per month at point B. Now consider what would happen if Ms. Ryder decided to produce 1 more snowboard per month.

The segment of the curve around point B is magnified in Figure 2. We can think of this as the opportunity cost of producing an additional snowboard at Plant 1. This opportunity cost equals the absolute value of the slope of the production possibilities curve.

Lesson summary: Opportunity cost and the PPC

Expanding snowboard production to 51 snowboards per month from 50 snowboards per month requires a reduction in ski production to 98 pairs of skis per month from pairs. The absolute value of the slope of a production possibilities curve measures the opportunity cost of an additional unit of the good on the horizontal axis measured in terms of the quantity of the good on the vertical axis that must be forgone.

The absolute value of the slope of any production possibilities curve equals the opportunity cost of an additional unit of the good on the horizontal axis.

Artist Illustrates Her Long Distance Relationship Struggles And Joys

It is the amount of the good on the vertical axis that must be given up in order to free up the resources required to produce one more unit of the good on the horizontal axis. We will make use of this important fact as we continue our investigation of the production possibilities curve. Each of the plants, if devoted entirely to snowboards, could produce snowboards.

Plants 2 and 3, if devoted exclusively to ski production, can produce and 50 pairs of skis per month, respectively. The exhibit gives the slopes of the production possibilities curves for each plant. The opportunity cost of an additional snowboard at each plant equals the absolute values of these slopes that is, the number of pairs of skis that must be given up per snowboard.

The steeper the curve, the greater the opportunity cost of an additional snowboard. Here, the opportunity cost is lowest at Plant 3 and greatest at Plant 1.

The opportunity cost of an additional snowboard at each plant equals the absolute values of these slopes. More generally, the absolute value of the slope of any production possibilities curve at any point gives the opportunity cost of an additional unit of the good on the horizontal axis, measured in terms of the number of units of the good on the vertical axis that must be forgone.

The greater the absolute value of the slope of the production possibilities curve, the greater the opportunity cost will be. The plant for which the opportunity cost of an additional snowboard is greatest is the plant with the steepest production possibilities curve; the plant for which the opportunity cost is lowest is the plant with the flattest production possibilities curve.

In Plant 2, she must give up one pair of skis to gain one more snowboard.

Opportunity cost & the production possibilities curve (PPC) (article) | Khan Academy

We have already seen that an additional snowboard requires giving up two pairs of skis in Plant 1. Comparative Advantage and the Production Possibilities Curve To construct a combined production possibilities curve for all three plants, we can begin by asking how many pairs of skis Alpine Sports could produce if it were producing only skis.

To find this quantity, we add up the values at the vertical intercepts of each of the production possibilities curves in Figure 2. These intercepts tell us the maximum number of pairs of skis each plant can produce. Plant 1 can produce pairs of skis per month, Plant 2 can produce pairs of skis at per month, and Plant 3 can produce 50 pairs.

Alpine Sports can thus produce pairs of skis per month if it devotes its resources exclusively to ski production. In that case, it produces no snowboards. Now suppose the firm decides to produce snowboards. That will require shifting one of its plants out of ski production. Which one will it choose to shift?

The sensible thing for it to do is to choose the plant in which snowboards have the lowest opportunity cost—Plant 3. It has an advantage not because it can produce more snowboards than the other plants all the plants in this example are capable of producing up to snowboards per month but because it is the least productive plant for making skis. Producing a snowboard in Plant 3 requires giving up just half a pair of skis.

Economists say that an economy has a comparative advantage In producing a good or service, the situation that occurs if the opportunity cost of producing that good or service is lower for that economy than for any other. Plant 3 has a comparative advantage in snowboard production because it is the plant for which the opportunity cost of additional snowboards is lowest.

2.2 The Production Possibilities Curve

To put this in terms of the production possibilities curve, Plant 3 has a comparative advantage in snowboard production the good on the horizontal axis because its production possibilities curve is the flattest of the three curves. At point A, Alpine Sports produces pairs of skis per month and no snowboards. If the firm wishes to increase snowboard production, it will first use Plant 3, which has a comparative advantage in snowboards.

It need not imply that a particular plant is especially good at an activity. In our example, all three plants are equally good at snowboard production. Plant 3, though, is the least efficient of the three in ski production. Alpine thus gives up fewer skis when it produces snowboards in Plant 3. Comparative advantage thus can stem from a lack of efficiency in the production of an alternative good rather than a special proficiency in the production of the first good.

We begin at point A, with all three plants producing only skis. Production totals pairs of skis per month and zero snowboards. If the firm were to produce snowboards at Plant 3, ski production would fall by 50 pairs per month recall that the opportunity cost per snowboard at Plant 3 is half a pair of skis. That would bring ski production to pairs, at point B. If Alpine Sports were to produce still more snowboards in a single month, it would shift production to Plant 2, the facility with the next-lowest opportunity cost.

Producing snowboards at Plant 2 would leave Alpine Sports producing snowboards and pairs of skis per month, at point C. If the firm were to switch entirely to snowboard production, Plant 1 would be the last to switch because the cost of each snowboard there is 2 pairs of skis. With all three plants producing only snowboards, the firm is at point D on the combined production possibilities curve, producing snowboards per month and no skis.

Notice that this production possibilities curve, which is made up of linear segments from each assembly plant, has a bowed-out shape; the absolute value of its slope increases as Alpine Sports produces more and more snowboards. This is a result of transferring resources from the production of one good to another according to comparative advantage.

We shall examine the significance of the bowed-out shape of the curve in the next section. The fact that the opportunity cost of additional snowboards increases as the firm produces more of them is a reflection of an important economic law. The law of increasing opportunity cost As an economy moves along its production possibilities curve in the direction of producing more of a particular good, the opportunity cost of additional units of that good will increase.

We have seen the law of increasing opportunity cost at work traveling from point A toward point D on the production possibilities curve in Figure 2. The opportunity cost of each of the first snowboards equals half a pair of skis; each of the next snowboards has an opportunity cost of 1 pair of skis, and each of the last snowboards has an opportunity cost of 2 pairs of skis. The law also applies as the firm shifts from snowboards to skis.

Suppose it begins at point D, producing snowboards per month and no skis. It can shift to ski production at a relatively low cost at first. The opportunity cost of the first pairs of skis is just snowboards at Plant 1, a movement from point D to point C, or 0. We would say that Plant 1 has a comparative advantage in ski production.

Categories: