![]() This shows a trade-off between working and hours spent in leisure. ![]() With the help of marginal opportunity cost, we can easily depict the shape of the production. It is read as a sacrifice in the production of good Y, to produce more units of good X (or change in Y over a change in X). If the government increases spending on the military, then the opportunity cost will be less spending on another public service, such as health care. To construct the production possibility curve we calculate marginal opportunity cost using the slope formula. ![]() PPF and recessionĪ recession can be shown by output falling below the production possibility frontier (from A to B).Īny government faces a trade-off in how to use scarce resources and tax revenue. Similarly, a decline in investment can enable more consumer goods in the short-term but can lead to lower rates of economic growth. Increase in capital goods has an opportunity cost of fewer consumer goods, but in long-term can enable economic growth. However, if the investment is successful, then in the long-run, productive capacity will increase and the PPF curve will shift to the right.building new factories) then in the short-term, consumption will go down. If more resources are devoted to capital goods (e.g.One choice an economy faces is between capital goods (investment) and consumer goods. Production possibility frontier and investment If the PPF curve shifts to the right, then it is similar effect to the LRAS shifting to the right Note: there is a link between macroeconomics and the long-run aggregate supply curve. If there is an increase in land, labour or capital or an increase in the productivity of these factors, then the PPF curve can shift outwards enabling a better trade-off. On the PPF curve, it is impossible to increase one choice, without causing less production of the other. Pareto efficiency is any point on the PPF curve.At point D, we can increase both goods and services without any opportunity cost. At point D, the economy is inefficient.But, the opportunity cost is that output of goods falls from 22 to 18. Moving from Point A to B will lead to an increase in services (21-27).Diagram of Production Possibility Frontier As it moves from the origin to the x-axis, you can see that for very little increase in the number of automobiles, the number of forklifts falls significantly, and thus, the curve is steeper.A production possibility frontier shows how much an economy can produce given existing resources.Ī production possibility can show the different choices that an economy faces.įor example, when an economy produces on the PPF curve, increasing the output of goods will have an opportunity cost of fewer services. The shape of the curve denotes the increasing opportunity costs as the curve is steeper. Therefore, the opportunity cost of one more forklift is 1/3 of 1 automobile. O p p o r t u n i t y cos t o f o n e m o r e f o r k l i f t = 2 6 = 1 3 So, the opportunity cost of one more forklift is as follows. To consume 6 more automobiles, the economy has to give up 2 units of forklifts at point C. Therefore, the opportunity cost for one more automobile is 0.45 units of forklifts. O p p o r t u n i t y cos t o f o n e m o r e a u t o m o b i l e = 9 2 = 4. So, the opportunity cost of one more automobile is as follows. To consume 2 more units of automobiles, it moves toward point D.Īt point D, the economy gives up 9 units of forklifts. When the economy is at point C, it consumes 4 units of automobiles and 21 units of forklifts. Is production at a point outside the production possibilities curve currently possible? Could a future advance in technology allow production beyond the current production possibilities curve? Could international trade allow a country to consume beyond its current production possibilities curve?.If the economy characterized by this production possibilities table and curve is producing 3 automobiles and 20 forklifts, what could you conclude about its use of its available resources?.If the economy is at point C, what is the cost of one more automobile? Of one more forklift? Which characteristic of the production possibilities curve reflects the law of increasing opportunity costs: its shape or its length?.Upon what specific assumptions is this production possibilities curve based? ![]() Refer to the following production possibilities table for consumer goods (automobiles) and capital goods (forklifts).
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