Figure 2.6 Production Possibilities for the Economy. Instead of the bowed-out production possibilities curve ABCD, we get a bowed-in curve, AB′C′D. To put this in terms of the production possibilities curve, Plant 3 has a comparative advantage in snowboard production (the good on the horizontal axis) because its production possibilities curve is the flattest of the three curves. The second plant, while smaller than the first, was designed to produce snowboards as well as skis. Such specialization is typical in an economic system. Increasing the availability of these goods would improve the standard of living. The U.S. economy looked very healthy in the beginning of 1929. 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. It would be producing more snowboards and more pairs of skis—and using the same quantities of factors of production it was using at B′. In other words, if more of good A is produced, less of good B can be produced given the resources and production technolo… The segment of the curve around point B is magnified in Figure 2.3 “The Slope of a Production Possibilities Curve”. In Plant 2, she must give up one pair of skis to gain one more snowboard. We shall consider two goods and services: national security and a category we shall call “all other goods and services.” This second category includes the entire range of goods and services the economy can produce, aside from national defense and security. Plant 3 has a comparative advantage in snowboard production because it is the plant for which the opportunity cost of additional snowboards is lowest. (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. The economy had moved well within its production possibilities curve. The law of increasing opportunity cost holds that as an economy moves along its production possibilities curve in the direction of producing more of a particular good, the opportunity cost of additional units of that good will increase. We can think of each of Ms. Ryder’s three plants as a miniature economy and analyze them using the production possibilities model. Such an allocation implies that the law of increasing opportunity cost will hold. An economy achieves a point on its production possibilities curve only if it allocates its factors of production on the basis of comparative advantage. Please share your supplementary material! To see this relationship more clearly, examine Figure 2.3 “The Slope of a Production Possibilities Curve”. With all three plants producing only snowboards, the firm is at point D on the combined production possibilities curve, producing 300 snowboards per month and no skis. Figure 2.9 Efficient Versus Inefficient Production. The bowed-out production possibilities curve for Alpine Sports illustrates the law of increasing opportunity cost. How much money do you start with in monopoly revolution? That would bring ski production to 300 pairs, at point B. Think about what life would be like without specialization. The bowed-out shape of the production possibilities curve results from allocating resources based on comparative advantage. The plant for which the opportunity cost of an additional snowboard is greatest is the plant with the steepest production possibilities curve; the plant for which the opportunity cost is lowest is the plant with the flattest production possibilities curve. 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. Plant 1 can produce 200 pairs of skis per month, Plant 2 can produce 100 pairs of skis at per month, and Plant 3 can produce 50 pairs. What level is an economy operating when it is at its production possibilities frontier. Notice that this curve is linear. 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. Here, the opportunity cost is lowest at Plant 3 and greatest at Plant 1. Figure 2.5 The Combined Production Possibilities Curve for Alpine Sports. In terms of the production possibilities curve in Figure 2.7 “Spending More for Security”, the choice to produce more security and less of other goods and services means a movement from A to B. Why Society Must Choose. We assume that the factors of production and technology available to each of the plants operated by Alpine Sports are unchanged. High unemployment indicates the economy is operating below full capacity and is inefficient; this will lead to lower output and incomes. Where will it produce the calculators? Producing 1 additional snowboard at point B′ requires giving up 2 pairs of skis. In an actual economy, with a tremendous number of firms and workers, it is easy to see that the production possibilities curve will be smooth. This opportunity cost equals the absolute value of the slope of the production possibilities curve. 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 slope of the linear production possibilities curve in Figure 2.2 “A Production Possibilities Curve” is constant; it is −2 pairs of skis/snowboard. This way you will be prepared to get into sussing out the potential new inefficiencies that you may accidentally unleash in pursuit of greater efficiency. The law also applies as the firm shifts from snowboards to skis. She also modified the first plant so that it could produce both snowboards and skis. The bowed shape of the production possibilities frontier can be explained by the fact that Select one: a. all resources are scarce. It retains its negative slope and bowed-out shape. In the example above, an advance in gun-making technology makes the economy better at producing guns. In drawing production possibilities curves for the economy, we shall generally assume they are smooth and “bowed out,” as in Panel (b). at the full employment level … When factors of production are allocated on a basis other than comparative advantage, the result is inefficient production. Producing a snowboard in Plant 3 requires giving up just half a pair of skis. An economy that is operating inside its production possibilities curve could, by moving onto it, produce more of all the goods and services that people value, such as food, housing, education, medical care, and music. 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. This spending took a variety of forms. When an economy is operating on its production possibilities curve, we say that it is engaging in efficient production. The negative slope of the production possibilities curve reflects the scarcity of the plant’s capital and 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. The bowed-out curve of Figure 2.5 “The Combined Production Possibilities Curve for Alpine Sports” becomes smoother as we include more production facilities. A country operating outside of the production possibilities frontier is: A) operating efficiently. An economy working below its most efficient production levels points inside the production possibilities frontier. In material terms, the forgone output represented a greater cost than the United States would ultimately spend in World War II. Instead, it lays out the possibilities facing the economy. For which type would the government most likely undertake many projects that would be considered inefficient or counterproductive (in other words, ... d. current saving exceeds the level of investment. 62. The slopes of the production possibilities curves for each plant differ. Specialization implies that an economy is producing the goods and services in which it has a comparative advantage. The curve is a downward-sloping straight line, indicating that there is a linear, negative relationship between the production of the two goods. The production of both goods rises. 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