![]() ![]() ![]() On the other hand, if the economy is producing close to the maximum amount of butter produced, it's already employed all of the resources that are better at producing butter than producing guns. Because these resources are better at making butter, they can make a lot of butter instead of just a few guns, which results in a low opportunity cost of butter. To start producing butter and still maintain efficiency, the economy would shift the resources that are best at producing butter (or worst at producing guns) first. If an economy is producing only guns, it has some of the resources that are better at producing butter producing guns instead. This is because there are likely to be some resources that are better at producing guns and others that are better at producing butter. This property implies that the opportunity cost of producing butter increases as the economy produces more butter and fewer guns, which is represented by moving down and to the right on the graph.Įconomists believe that, in general, the bowed-out PPF is a reasonable approximation of reality. Because of this, the magnitude of the slope of the PPF increases, meaning the slope gets steeper, as we move down and to the right along the curve. You may have noticed that the PPF was drawn such that it is bowed out from the origin. If you wanted to calculate the opportunity cost of the thing on the y-axis, you could either redraw the PPF with the axes switched or just note that the opportunity cost of the thing on the y-axis is the reciprocal of the opportunity cost of the thing on the x-axis. In general, the magnitude of the PPF's slope represents how many of the things on the y-axis must be forgone in order to produce one more of the thing on the x-axis, or, alternatively, the opportunity cost of the thing on the x-axis. Therefore, the magnitude, or absolute value, of the slope of the PPF represents how many guns must be given up in order to produce one more pound of butter between any 2 points on the curve on average.Įconomists call this the opportunity cost of butter, given in terms of guns. In going from the fourth to the fifth point, the economy must give up production of 75 guns if it wants to produce another 50 pounds of butter, and the average slope of the PPF between these points is (0-75)/(400-350) = -75/50 = -3/2.In going from the third to the fourth point, the economy must give up production of 75 guns if it wants to produce another 100 pounds of butter, and the average slope of the PPF between these points is (75-150)/(350-250) = -75/100 = -3/4.In going from the second to the third point, the economy must give up production of 40 guns if it wants to produce another 150 pounds of butter, and the average slope of the PPF between these points is (150-190)/(250-100) = -40/150, or -4/15.Similar calculations can be made between the other labeled points: Not coincidentally, the average slope of the PPF over this region is (190-200)/(100-0) = -10/100, or -1/10. The slope of the production possibilities frontier represents the magnitude of this tradeoff.įor example, in moving from the top left point to the next point down the curve, the economy has to give up production of 10 guns if it wants to produce 100 more pounds of butter. Any point below point F is considered extreme inefficiency and could be an indicator of a severe recession.Since the production possibilities frontier represents all of the points where all resources are being used efficiently, it must be the case that this economy has to produce fewer guns if it wants to produce more butter, and vice versa.At this point, you do not have the needed amounts of resources to produce the number of goods shown. Point G represents a production level that is unattainable. ![]() You can produce at this point, but you are not using all your resources as efficiently as possible. Point F in the graph below represents an inefficient use of resources.In the below graph this is represented by points A, B, C, D, and E. This is represented by any point on the production possibilities curve. Productive Efficiency - This efficiency means we are producing at a combination that minimizes costs.If you are given the situation where a particular society needs about an equal amount of sugar and wheat then the allocative efficient point would be C. This is represented by a point on the production possibilities curve that meets the desires and needs of a particular society. Allocative Efficiency - This efficiency means we are producing at the point that society desires.The production possibilities curve can illustrate several economic concepts including: ![]()
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