Suppose Plant 1 is producing 100 pairs of skis and 50 snowboards per month at point B. PP curve slopes down from left to right because in presence of scarcity of resources more of one good can be produced only if resources are withdrawn from production of other good. The production possibilities curves for the two plants are shown, along with the combined curve for both plants. Creative Commons Attribution License Because the PPF is downward sloping from left to right, the only way society can obtain more education is by giving up some healthcare. Now consider the other end, at the lower right, of the production possibilities frontier. Ski sales grew, and she also saw demand for snowboards risingparticularly after snowboard competition events were included in the 2002 Winter Olympics in Salt Lake City. We will generally draw production possibilities curves for the economy as smooth, bowed-out curves, like the one in Panel (b). 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. 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 law also applies as the firm shifts from snowboards to skis. c. relatively cheap at low levels of output. This is the opportunity cost of the additional education. b. used efficiently. The slope of the linear production possibilities curve in Figure 2.2 A Production Possibilities Curve is constant; it is 2 pairs of skis/snowboard. The reverse is also true: the U.S. has a lower opportunity cost of producing wheat than Brazil. Economists often use models such as the production possibilities model with graphs that show the general shapes of curves but that do not include specific numbers. While every society must choose how much of each good or service it should produce, it does not need to produce every single good it consumes. With trade, manufacturers produce goods where the opportunity cost is lowest, so total production increases, benefiting both trading parties. That is the tradeoff society faces. In the section of the curve shown here, the slope can be calculated between points B and B. The study of economics does not presume to tell a society what choice it should make along its production possibilities frontier. 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. It would be producing more snowboards and more pairs of skisand using the same quantities of factors of production it was using at B. In the real world, of course, we have more than two goods and services, and we have more resources than just labor, but the general rule still holds. The slope between points B and B is 2 pairs of skis/snowboard. 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 is generally higher in Brazil. 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. Thus, a society must choose between tradeoffs in the present. Its land is devoted largely to nonagricultural use. 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. People are having cosmetic surgery on every part of their bodies, but no high school or college education exists. When devoted solely to snowboards, it produces 100 snowboards per month. After all, thats not what they were trained for. This curve depicts an entire economy that produces only skis and snowboards. Suppose society has chosen to operate at point B, and it is considering producing more education. . That is because the resources transferred from the production of other goods and services to the production of security had a greater and greater comparative advantage in producing things other than security. At A all resources go to healthcare and at B, most go to healthcare. In the chapter on International Trade you will learn that countries differences in comparative advantage determine which goods they will choose to produce and trade. Graphically, the rise is small and the run is large so the slope (which is the ratio of rise over run) is flat. Because an economys production possibilities curve assumes the full use of the factors of production available to it, the failure to use some factors results in a level of production that lies inside the production possibilities curve. Every economy faces two situations in which it may be able to expand consumption of all goods. Nations specialize as well. Except where otherwise noted, textbooks on this site Now imagine that some of these resources are diverted from healthcare to education, so that the economy is at point B instead of point A. What are the similarities between a consumers budget constraint and societys production possibilities frontier, not just graphically but analytically? Want to cite, share, or modify this book? That is the tradeoff society faces. 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). The production possibilities frontier in Figure 2.3 illustrates this situation. The curvature of the production possibilities frontier shows that as we add more resources to education, moving from left to right along the horizontal axis, the original increase in opportunity cost is fairly small, but gradually increases. Economists conclude that it is better to be on the production possibilities curve than inside it. To construct a production possibilities curve, we will begin with the case of a hypothetical firm, Alpine Sports, Inc., a specialized sports equipment manufacturer. Suppose society has chosen to operate at point B, and its considering producing more education. The slope of the PPF gives the opportunity cost of producing an additional unit of wheat. Just as individuals cannot have everything they want and must instead make choices, society as a whole cannot haveeverything it might want, either. Because the PPF is downward sloping from left to right, the only way society can obtain more education is by giving up some healthcare. While individuals face budget and time constraints, societies face the constraint of limited resources (e.g. In contrast, the PPF has a curved shape because of the law of the diminishing returns. The study of economics does not presume to tell a society what choice it. In addition, over time, improvements in technology can increase the level of production with given resources, and hence push out the PPF. While every society must choose how much of each good it should produce, it does not need to produce every single good it consumes. But the amount of education gained is great, because thats what teachers are trained for. 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. As you read this section, you will see parallels between individual choice and societal choice. An economy that fails to make full and efficient use of its factors of production will operate inside its production possibilities curve. The production possibilities frontier can illustrate two kinds of efficiency: productive efficiency and allocative efficiency. In Plant 2, she must give up one pair of skis to gain one more snowboard. d. an upward-sloping straight line. The OpenStax name, OpenStax logo, OpenStax book covers, OpenStax CNX name, and OpenStax CNX logo 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. How do you define and measure opportunity cost using the PPF model? She also modified the first plant so that it could produce both snowboards and skis. At the individual and. The Production Possibilities Frontier and Social Choices. The production possibilities curve shown suggests an economy that can produce two goods, food and clothing. For example, children are seeing a doctor every day, whether theyre sick or not, but not attending school. In effect, the production possibilities frontier plays the same role for society as the budget constraint plays for Alphonso. we learned that every society faces the problem of scarcity, where limited resources conflict with unlimited needs and wants. all the doctors and all the teachers) are devoted to providinghealth care and none isleft for education. This can be illustrated by the PPFs of the two countries in the following graphs. For consumers, there is only one scarce resource: budget dollars. Figure 1 (shown again). If Brazil devoted all of its resources to producing wheat, it would be producing at point A. 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. There are two major differences between a budget constraint and a production possibilities frontier. Allocative efficiency means that the particular mix of goods being producedthat is, the specific choice along the production possibilities frontierrepresents the allocation that society most desires. Specialization implies that an economy is producing the goods and services in which it has a comparative advantage. The firm then starts producing snowboards. This production possibilities curve shows an economy that produces only skis and snowboards. As time passes, the production possibilities frontier shifts outward due to the accumulation of inputs and technological progress. An inefficient machine operates at high cost, while an efficient machine operates at lower cost, because it is not wasting energy or materials. I'm pretty sure it wasn't mentioned in previous videos in this section. Here, the opportunity cost is lowest at Plant 3 and greatest at Plant 1. The lesson is not that society is likely to make an extreme choice like devoting no resources to education at point A or no resources to health at point F. Instead, the lesson is that the gains from committing additional marginal resources to education depend on how much is already being spent. 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. We can think of this as the opportunity cost of producing an additional snowboard at Plant 1. At point A, all available resources (i.e. In this way, the law of diminishing returns produces the outward-bending shape of the production possibilities frontier. We can think of each of Ms. Ryders three plants as a miniature economy and analyze them using the production possibilities model. Now suppose Alpine Sports is fully employing its factors of production. Society can choose any combination of the two goods on or inside the PPF. However, economics can point out that some choices are unambiguously better than others. Such an allocation implies that the law of increasing opportunity cost will hold. Producing 100 snowboards at Plant 2 would leave Alpine Sports producing 200 snowboards and 200 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. 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 100 snowboards per month) but because it is the least productive plant for making skis. are licensed under a, The Production Possibilities Frontier and Social Choices. In other words, the products are limited because the resources are limited. The slope of the PPF indicates the opportunity cost of producing one good versus the other good, and the opportunity cost can be compared to the opportunity costs of another producer to determine comparative advantage. To understand why the PPF is curved, start by considering point A at the top left-hand side of the PPF.

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