The bowed-out shape of the production possibilities curve results from allocating resources based on comparative advantage. Why don't libraries smell like bookstores? If an economy is operating at a point on the production possibilities curve, economists say that it is operating a). To find this quantity, we add up the values at the vertical intercepts of each of the production possibilities curves in Figure 2.4 “Production Possibilities at Three Plants”. Figure 2.9 “Efficient Versus Inefficient Production” illustrates the result. The result is the bowed-in curve AB′C′D. The opportunity cost of skis at Plant 2 is 1 snowboard per pair of skis. We can think of each of Ms. Ryder’s three plants as a miniature economy and analyze them using the production possibilities model. (Many students are helped when told to read this result as “−2 pairs of skis per snowboard.”) We get the same value between points B and C, and between points A and C. Figure 2.2 A Production Possibilities Curve. In other words, if more of good A is produced, less of good B can be produced given the resources and production technolo… Now suppose Alpine Sports is fully employing its factors of production. Instead of the bowed-out production possibilities curve ABCD, we get a bowed-in curve, AB′C′D. The reason an unregulated natural monopolist will produce at an economically inefficient quantity is A) due to the fact that the monopolist will equate marginal cost with price to determine the output level. Under certain circumstances, firms in market economies may fail to produce efficiently. The sensible thing for it to do is to choose the plant in which snowboards have the lowest opportunity cost—Plant 3. We assume that the factors of production and technology available to each of the plants operated by Alpine Sports are unchanged. Now suppose that a large fraction of the economy’s workers lose their jobs, so the economy no longer makes full use of one factor of production: labor. The slope of Plant 1’s production possibilities curve measures the rate at which Alpine Sports must give up ski production to produce additional snowboards. While even smaller than the second plant, the third was primarily designed for snowboard production but could also produce skis. The answer is “Yes,” and the key lies in comparative advantage. 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. In the wake of the 9/11 attacks in 2001, nations throughout the world increased their spending for national security. An economy cannot operate on its production possibilities curve unless it has full employment. An economy that fails to make full and efficient use of its factors of production will operate inside its production possibilities curve. If it fails to do that, it will operate inside the curve. We will generally draw production possibilities curves for the economy as smooth, bowed-out curves, like the one in Panel (b). C) operating inefficiently but in an area that can be attained with proper use of resources. We can use the production possibilities model to examine choices in the production of goods and services. Figure 2.3 The Slope of a 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. These are also illustrated with a production possibilities curve. One, of course, was increased defense spending. The Great Depression was a costly experience indeed. 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. When an economy lies well within the PPF boundary, there is an inefficient use of resources or under-utilization of resources. She also modified the first plant so that it could produce both snowboards and skis. The table in Figure 2.2 “A Production Possibilities Curve” gives three combinations of skis and snowboards that Plant 1 can produce each month. Where will it produce the calculators? The steeper the curve, the greater the opportunity cost of an additional snowboard. 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. Here it becomes possible for output of two goods or services to increase at the same time. (Figure: Strawberries and Submarines) Suppose the economy is operating at point G. This implies that: the economy is experiencing unemployment and/or inefficient allocation of resources. Suppose Alpine Sports operates the three plants we examined in Figure 2.4 “Production Possibilities at Three Plants”. The opportunity cost of each of the first 100 snowboards equals half a pair of skis; each of the next 100 snowboards has an opportunity cost of 1 pair of skis, and each of the last 100 snowboards has an opportunity cost of 2 pairs of skis. In contrast, if the economy is operating below the curve, it is said to be operating inefficiently because it could reallocate resources in order to produce more of both goods or some resources such as labor or capital are sitting idle and could be fully employed to produce more of both goods. These values are plotted in a production possibilities curve for Plant 1. b). Producing one good always creates a trade off over producing another good. Increasing the availability of these goods would improve the standard of living. This curve depicts an entire economy that produces only skis and snowboards. If an economy is operating at a point that is inside the curve it is inefficient. It is hard to imagine that most of us could even survive in such a setting. The plant with the lowest opportunity cost of producing snowboards is Plant 3; its slope of −0.5 means that Ms. Ryder must give up half a pair of skis in that plant to produce an additional snowboard. Given the labor and the capital available at both plants, it can produce the combinations of the two goods at the two plants shown. When devoted solely to snowboards, it produces 100 snowboards per month. Thus, the economy chose to increase spending on security in the effort to defeat terrorism. When an economy is operating on its production possibilities curve, we say that it is engaging in efficient production. Local and state governments also increased spending in an effort to prevent terrorist attacks. The next 100 pairs of skis would be produced at Plant 2, where snowboard production would fall by 100 snowboards per month. This is in the context of a production possibilities curve. 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. Even though each of the plants has a linear curve, combining them according to comparative advantage, as we did with 3 plants in Figure 2.5 “The Combined Production Possibilities Curve for Alpine Sports”, produces what appears to be a smooth, nonlinear curve, even though it is made up of linear segments. In this section, we shall assume that the economy operates on its production possibilities curve so that an increase in the production of one good in the model implies a reduction in the production of the other. In Plant 2, she must give up one pair of skis to gain one more snowboard. In applying the model, we assume that the economy can produce two goods, and we assume that technology and the factors of production available to the economy remain unchanged. Combination A involves devoting the plant entirely to ski production; combination C means shifting all of the plant’s resources to snowboard production; combination B involves the production of both goods. Clearly not. You must produce everything you consume; you obtain nothing from anyone else. An economy’s factors of production are scarce; they cannot produce an unlimited quantity of goods and services. c. strong demand for … It retains its negative slope and bowed-out shape. Lower GDP for the economy. Producing more snowboards requires shifting resources out of ski production and thus producing fewer skis. If the economy is on the production possibilities frontier (PPF), the economy is: (a) Productive inefficient (b) Operating with no unemployed resources What are the 7 categories in Linnaeus's system of classification? Here, an economy that can produce two categories of goods, security and “all other goods and services,” begins at point A on its production possibilities curve. Inefficient production occurs at any point inside the curve and all points along the curve are efficient points. Operational efficiency is primarily a metric that measures the efficiency of profit earned as a function of operational costs. Production totals 350 pairs of skis per month and zero snowboards. To see this relationship more clearly, examine Figure 2.3 “The Slope of a Production Possibilities Curve”. Much of the land in the United States has a comparative advantage in agricultural production and is devoted to that activity. Suppose that, as before, Alpine Sports has been producing only skis. If Alpine Sports selects point C in Figure 2.9 “Efficient Versus Inefficient Production”, for example, it will assign Plant 1 exclusively to ski production and Plants 2 and 3 exclusively to snowboard production. The attempt to provide it requires resources; it is in that sense that we shall speak of the economy as “producing” security. In the summer of 1929, however, things started going wrong. If an economy is operating inside its PPC and produces more as a result of using previously unemployed resources, or using resources more efficiently, this is referred to as actual growth. This occurs when the price is not equal to the marginal cost for firms and also the economy is operating on a point that does not lie on the PPF. In microeconomics, economic efficiency is, roughly speaking, a situation in which nothing can be improved without something else being hurt. Scarcity implies that a production possibilities curve is downward sloping; the law of increasing opportunity cost implies that it will be bowed out, or concave, in shape. Now suppose the firm decides to produce 100 snowboards. Figure 2.4 Production Possibilities at Three Plants. We shall examine the significance of the bowed-out shape of the curve in the next section. The segment of the curve around point B is magnified in Figure 2.3 “The Slope of a Production Possibilities Curve”. Plant 3 would be the last plant converted to ski production. Plants 2 and 3, if devoted exclusively to ski production, can produce 100 and 50 pairs of skis per month, respectively. Plant 3’s comparative advantage in snowboard production makes a crucial point about the nature of comparative advantage. At what level is the economy operating at when it is operating at a point inside the production possibilities curve? A movement from A to B requires shifting resources out of the production of all other goods and services and into spending on security. The second plant, while smaller than the first, was designed to produce snowboards as well as skis. 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. We will make use of this important fact as we continue our investigation of the production possibilities curve. could not produce any more of one good without sacrificing production of another good and without improving the production technology. Specialization means that an economy is producing the goods and services in which it has a comparative advantage. The production possibilities model does not tell us where on the curve a particular economy will operate. The production possibilities curve shown suggests an economy that can produce two goods, food and clothing. Now suppose that, to increase snowboard production, it transfers plants in numerical order: Plant 1 first, then Plant 2, and finally Plant 3. Panel (a) of Figure 2.6 “Production Possibilities for the Economy” shows the combined curve for the expanded firm, constructed as we did in Figure 2.5 “The Combined Production Possibilities Curve for Alpine Sports”. Chapter 1: Economics: The Study of Choice, Chapter 2: Confronting Scarcity: Choices in Production, 2.3 Applications of the Production Possibilities Model, Chapter 4: Applications of Demand and Supply, 4.2 Government Intervention in Market Prices: Price Floors and Price Ceilings, Chapter 5: Elasticity: A Measure of Response, 5.2 Responsiveness of Demand to Other Factors, Chapter 6: Markets, Maximizers, and Efficiency, Chapter 7: The Analysis of Consumer Choice, 7.3 Indifference Curve Analysis: An Alternative Approach to Understanding Consumer Choice, 8.1 Production Choices and Costs: The Short Run, 8.2 Production Choices and Costs: The Long Run, Chapter 9: Competitive Markets for Goods and Services, 9.2 Output Determination in the Short Run, Chapter 11: The World of Imperfect Competition, 11.1 Monopolistic Competition: Competition Among Many, 11.2 Oligopoly: Competition Among the Few, 11.3 Extensions of Imperfect Competition: Advertising and Price Discrimination, Chapter 12: Wages and Employment in Perfect Competition, Chapter 13: Interest Rates and the Markets for Capital and Natural Resources, Chapter 14: Imperfectly Competitive Markets for Factors of Production, 14.1 Price-Setting Buyers: The Case of Monopsony, Chapter 15: Public Finance and Public Choice, 15.1 The Role of Government in a Market Economy, Chapter 16: Antitrust Policy and Business Regulation, 16.1 Antitrust Laws and Their Interpretation, 16.2 Antitrust and Competitiveness in a Global Economy, 16.3 Regulation: Protecting People from the Market, Chapter 18: The Economics of the Environment, 18.1 Maximizing the Net Benefits of Pollution, Chapter 19: Inequality, Poverty, and Discrimination, Chapter 20: Macroeconomics: The Big Picture, 20.1 Growth of Real GDP and Business Cycles, Chapter 21: Measuring Total Output and Income, Chapter 22: Aggregate Demand and Aggregate Supply, 22.2 Aggregate Demand and Aggregate Supply: The Long Run and the Short Run, 22.3 Recessionary and Inflationary Gaps and Long-Run Macroeconomic Equilibrium, 23.2 Growth and the Long-Run Aggregate Supply Curve, Chapter 24: The Nature and Creation of Money, 24.2 The Banking System and Money Creation, Chapter 25: Financial Markets and the Economy, 25.1 The Bond and Foreign Exchange Markets, 25.2 Demand, Supply, and Equilibrium in the Money Market, 26.1 Monetary Policy in the United States, 26.2 Problems and Controversies of Monetary Policy, 26.3 Monetary Policy and the Equation of Exchange, 27.2 The Use of Fiscal Policy to Stabilize the Economy, Chapter 28: Consumption and the Aggregate Expenditures Model, 28.1 Determining the Level of Consumption, 28.3 Aggregate Expenditures and Aggregate Demand, Chapter 29: Investment and Economic Activity, Chapter 30: Net Exports and International Finance, 30.1 The International Sector: An Introduction, 31.2 Explaining Inflation–Unemployment Relationships, 31.3 Inflation and Unemployment in the Long Run, Chapter 32: A Brief History of Macroeconomic Thought and Policy, 32.1 The Great Depression and Keynesian Economics, 32.2 Keynesian Economics in the 1960s and 1970s, 32.3. 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