Production Possibilities Curve as a model of a country's economy (video) | Khan Academy
A production possibilities curve shows the relationship between the production of which two items? Get the answers you need, now!. A production possibilities curve shows the relationship between the production of which two items? Any two categories of items. Efficiency. Using resources in. possibilities curve shows the relationship between the production of which two items? Why does a production possibilities curve have a bowed-out shape?.
But if you spend all your time getting rabbits you're not going to have any time to get berries. So you're going to be able to get 0 berries. Now let's say that you were to allocate a little bit more time to get berries and a little bit less time to get rabbits. So we'll call that Scenario B. We'll call scenario B the reality where you have enough time to get 4 rabbits on average.
And when you do that, all of a sudden you're able to get berries. And when we do these different scenarios, we're assuming that everything else is equal. You're not changing the amount of time you have either hunting or gathering. You're not changing the amount of sleep.
You're not changing your techniques for hunting rabbits, or hunting berries, or you're not somehow looking to do other things with your time. So all other things are equal. And the general term for this, and it sounds very fancy if you were to say it in a conversation, is ceteris paribus.Shifting the Production Possibilities Curve (PPC)- Econ 1.2
Which literally means-- so any time someone says, oh ceteris parabus, we assume this variable changes or whatever else-- they're saying we're assuming everything else is being held equal.
So ceteris means all other things. You're probably familiar with et cetera. It's the same word, essentially. Other things in paribus, other things equal. So when you're going from Scenario A to Scenario B you're not changing the amount of time you're sleeping. You're not changing somehow the geography where you are in a dramatic way. You're not changing the tools you use or the technology.
Everything else is equal. The only variable you're changing is how much time you allocate to finding rabbits versus finding berries. So let's do some more scenarios assuming ceteris paribus. So let me do Scenario C. You could, on average, have enough time to get 3 rabbits.
But if you get 3 rabbits then all of a sudden you will to get-- or if you're only getting 3 rabbits, you're now able to get berries.
And let's do a couple more. I'm going to do two more scenarios. So let's say Scenario D, if you reduce the amount of time you spend getting rabbits so you get 2 rabbits, now all of a sudden you have enough time on average to get berries.
And then, let's say you spend even less time hunting for rabbits, on average. Then you have even more time for berries.
Opportunity cost & the production possibilities curve (PPC) (article) | Khan Academy
And so you're able to get to berries and I'll do one more scenario here. So let's say Scenario F-- and let's call these the scenarios. Scenarios A through F. So Scenario F is you spend all your time looking for berries.
In which case, on average, you're going to be able to get berries a day.
But since you have no time for rabbits you aren't going to get any rabbits. So what I want to do is plot these. And on one axis I'll have the number of rabbits. And on the other axis I'll have the number of berries. So let me do it right over here. So this axis, I will call this my rabbit axis, rabbits. That will be 0. And then this will be 1, 2, 3, 4, and then that will be 5 rabbits.
And then in this axis I will do the berries. So this right over here, let's make this berries. This is berries. Increasing the availability of these goods would improve the standard of living. Economists conclude that it is better to be on the production possibilities curve than inside it.
Two things could leave an economy operating at a point inside its production possibilities curve. First, the economy might fail to use fully the resources available to it. Second, it might not allocate resources on the basis of comparative advantage. In either case, production within the production possibilities curve implies the economy could improve its performance.
Idle Factors of Production Suppose an economy fails to put all its factors of production to work. Some workers are without jobs, some buildings are without occupants, some fields are without crops.
If all the factors of production that are available for use under current market conditions are being utilized, the economy has achieved full employment Situation in which all the factors of production that are available for use under current market conditions are being utilized.
Production Possibilities Curve as a model of a country's economy
An economy cannot operate on its production possibilities curve unless it has full employment. As a result of a failure to achieve full employment, the economy operates at a point such as B, producing FB units of food and CB units of clothing per period. Putting its factors of production to work allows a move to the production possibilities curve, to a point such as A.
The production of both goods rises. If it chooses to produce at point A, for example, it can produce FA units of food and CA units of clothing. In this example, production moves to point B, where the economy produces less food FB and less clothing CB than at point A. We often think of the loss of jobs in terms of the workers; they have lost a chance to work and to earn income.
But the production possibilities model points to another loss: Inefficient Production Now suppose Alpine Sports is fully employing its factors of production. Could it still operate inside its production possibilities curve? Could an economy that is using all its factors of production still produce less than it could? An economy achieves a point on its production possibilities curve only if it allocates its factors of production on the basis of comparative advantage.
If it fails to do that, it will operate inside the curve. Suppose that, as before, Alpine Sports has been producing only skis. With all three of its plants producing skis, it can produce pairs of skis per month and no snowboards.
The firm then starts producing snowboards. This time, however, imagine that Alpine Sports switches plants from skis to snowboards in numerical order: Plant 1 first, Plant 2 second, and then Plant 3. Had the firm based its production choices on comparative advantage, it would have switched Plant 3 to snowboards and then Plant 2, so it could have operated at a point such as C. Had the firm based its production choices on comparative advantage, it would have switched Plant 3 to snowboards and then Plant 2, so it would have operated at point C.
When an economy is operating on its production possibilities curve, we say that it is engaging in efficient production When an economy is operating on its production possibilities curve.
If it is using the same quantities of factors of production but is operating inside its production possibilities curve, it is engaging in inefficient production Situation in which the economy is using the same quantities of factors of production but is operating inside its production possibilities curve.
Inefficient production implies that the economy could be producing more goods without using any additional labor, capital, or natural resources. Suppose Alpine Sports operates the three plants we examined in Figure 2.
Suppose further that all three plants are devoted exclusively to ski production; the firm operates at A. Now suppose that, to increase snowboard production, it transfers plants in numerical order: Plant 1 first, then Plant 2, and finally Plant 3. Production on the production possibilities curve ABCD requires that factors of production be transferred according to comparative advantage.
Points on the production possibilities curve thus satisfy two conditions: If there are idle or inefficiently allocated factors of production, the economy will operate inside the production possibilities curve. Thus, the production possibilities curve not only shows what can be produced; it provides insight into how goods and services should be produced.
It suggests that to obtain efficiency in production, factors of production should be allocated on the basis of comparative advantage. Further, the economy must make full use of its factors of production if it is to produce the goods and services it is capable of producing. Specialization The production possibilities model suggests that specialization will occur. Specialization Situation in which an economy is producing the goods and services in which it has a comparative advantage.
If Alpine Sports selects point C in Figure 2. Such specialization is typical in an economic system. Workers, for example, specialize in particular fields in which they have a comparative advantage. People work and use the income they earn to buy—perhaps import—goods and services from people who have a comparative advantage in doing other things.
The result is a far greater quantity of goods and services than would be available without this specialization. Think about what life would be like without specialization. Imagine that you are suddenly completely cut off from the rest of the economy. You must produce everything you consume; you obtain nothing from anyone else. Would you be able to consume what you consume now? It is hard to imagine that most of us could even survive in such a setting.
The gains we achieve through specialization are enormous. Nations specialize as well. Much of the land in the United States has a comparative advantage in agricultural production and is devoted to that activity. Hong Kong, with its huge population and tiny endowment of land, allocates virtually none of its land to agricultural use; that option would be too costly. Its land is devoted largely to nonagricultural use. Key Takeaways A production possibilities curve shows the combinations of two goods an economy is capable of producing.
The downward slope of the production possibilities curve is an implication of scarcity. The bowed-out shape of the production possibilities curve results from allocating resources based on comparative advantage. Such an allocation implies that the law of increasing opportunity cost will hold.
An economy that fails to make full and efficient use of its factors of production will operate inside its production possibilities curve.
Specialization means that an economy is producing the goods and services in which it has a comparative advantage. Suppose a manufacturing firm is equipped to produce radios or calculators. It has two plants, Plant R and Plant S, at which it can produce these goods. Given the labor and the capital available at both plants, it can produce the combinations of the two goods at the two plants shown.
Output per day, Plant R Combination. Now one way to understand this production possibilities curve is it shows what can be efficiently produced by this country. If it efficiently utilized all of its resources, then it will produce some combination of forks and spoons that sit on the production possibilities curve. So this point right over here, this combination of spoons which would be that many spoons and that many forks, this combination over here, this would be efficient.
Production possibilities curve
That point x would be an efficient production for Utenslandia. So at this point right over here, let's call that point y. Now what happens if Utenslandia goes into some type of recession.
For whatever reason, it's not able to use its resources as efficiently, and we're talking about resources, we're talking about land, we're talking about maybe its factories, we're talking about the materials it has, maybe its labor, well on that situation, let's say it was operating efficiently here but then the recession happens and so it then it operates right over here, let's call this point right over here z, this would be an inefficient use of its resources, sitting behind the production possibilities curve.
So this is inefficient, just like that. And so one question you might have is well what about points that are beyond the production possibilities curve like point, let's just call that point a right over there. What about that point? Well, unless you have more inputs, unless you have more land, more capital, more labor, if you don't change the resources here, this is actually going to be an unattainable point for Utenslandia.
But let's say you really wanna reach it, how can that happen? Well, you can actually have investment or you could have more land or more labor.
So let's think about that scenario. So let me draw the two axes. So that's my fork axis, that's the quantity of forks that Utenslandia will produce in the year. This will be the spoon axis, right over there.