One way the PPF can shift outwards is if there is an increase in the active labour supply. Economic growth. Suppose Alpine Sports expands to 10 plants, each with a linear production possibilities curve. As we combine the production possibilities curves for more and more units, the curve becomes smoother. Keep in mind that some texts will call it the production possibilities curve (PPC) while this post calls it the production possibilities frontier. The bowed-out curve of Figure 2.5 “The Combined Production Possibilities Curve for Alpine Sports” becomes smoother as we include more production facilities. Such an allocation implies that the law of increasing opportunity cost will hold. PPF - Outward Shift Analysis I Theme 1 Micro - YouTube. See Answer. When resources are underemployed or inefficiently used, then production does not take place on PP Curve. Production totals 350 pairs of skis per month and zero snowboards. We would say that Plant 1 has a comparative advantage in ski production. Its resources were fully employed; it was operating quite close to its production possibilities curve. To see this page as it is meant to appear, please enable your Javascript! Production Possibility curve (PPC) shows the maximum combinations of goods and services that can be produced by an economy in a given time period with its limited resources. Production had plummeted by almost 30%. The production possibilities curve is bow-shaped precisely because there reaches a critical point at which the produciton of less guns means the possibility for more butter, and vice versa. The greater the absolute value of the slope of the production possibilities curve, the greater the opportunity cost will be. Production on the production possibilities curve ABCD requires that factors of production be transferred according to comparative advantage. Assumptions. The negative slope of the production possibilities curve reflects the scarcity of the plant’s capital and labor. 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”. Figure 2.5 The Combined Production Possibilities Curve for Alpine Sports. (a) PPC slopes downward from left to right because if production of one commodity is to be increased then production of other commodity has to be sacrificed as there is scarcity of resources. An Emerging Consensus: Macroeconomics for the Twenty-First Century, 33.1 The Nature and Challenge of Economic Development, 33.2 Population Growth and Economic Development, Chapter 34: Socialist Economies in Transition, 34.1 The Theory and Practice of Socialism, 34.3 Economies in Transition: China and Russia, Appendix A.1: How to Construct and Interpret Graphs, Appendix A.2: Nonlinear Relationships and Graphs without Numbers, Appendix A.3: Using Graphs and Charts to Show Values of Variables, Appendix B: Extensions of the Aggregate Expenditures Model, Appendix B.2: The Aggregate Expenditures Model and Fiscal Policy. Ex- Labour becoming more skilled, improvement in technology, increase in productivity of land. Production of all other goods and services falls by OA – OB units per period. (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. Instead of the bowed-out production possibilities curve ABCD, we get a bowed-in curve, AB′C′D. Suppose further that all three plants are devoted exclusively to ski production; the firm operates at A. They continued to fall for several years. 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′. The production possibility curve shows the production possibilities of two goods that can be produced by an economy with the given amount of resources that it has. The slopes of the production possibilities curves for each plant differ. If the firm were to produce 100 snowboards at Plant 3, ski production would fall by 50 pairs per month (recall that the opportunity cost per snowboard at Plant 3 is half a pair of skis). The Production possibility curve will shift under following two condition: (a) change in resources, (b) Change in technology of production for both the goods. Christie Ryder began the business 15 years ago with a single ski production facility near Killington ski resort in central Vermont. We see in Figure 2.5 “The Combined Production Possibilities Curve for Alpine Sports” that, beginning at point A and producing only skis, Alpine Sports experiences higher and higher opportunity costs as it produces more snowboards. The Great Depression was a costly experience indeed. True This is a correct answer _____ Question 2 (Worth 5 points) The four factors of production are land, labor, capital, and government services. 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. A production–possibility frontier (PPF), production possibility curve (PPC), or production possibility boundary (PPB), or Transformation curve/boundary/frontier is a curve which shows various combinations of the amounts of two goods which can be produced within the given resources and technology/a graphical representation showing all the possible options of output for two products that can be … Further, the economy must make full use of its factors of production if it is to produce the goods and services it is capable of producing. Put calculators on the vertical axis and radios on the horizontal axis. Suppose an economy fails to put all its factors of production to work. The increase in the amount of capital, natural and human resources and progress in technology are determinants of economic growth. Instead, it lays out the possibilities facing the economy. It suggests that to obtain efficiency in production, factors of production should be allocated on the basis of comparative advantage. The exhibit gives the slopes of the production possibilities curves for each plant. Between 1929 and 1942, the economy produced 25% fewer goods and services than it would have if its resources had been fully employed. Economic growth is shown by a shift of the production possibilities curve outward and to the right. In this video, Sal explains how the production possibilities curve model can be used to illustrate changes in a country's actual and potential level of output. The outward or rightward shift of the Production Possibility Curve reflects the growth of resources or the advancement of technology. It is hard to imagine that most of us could even survive in such a setting. Now suppose the firm decides to produce 100 snowboards. One, of course, was increased defense spending. It can produce skis and snowboards simultaneously as well. Wiki User Answered . The bowed-out shape of the production possibilities curve results from allocating resources based on comparative advantage. Given the labor and the capital available at both plants, it can produce the combinations of the two goods at the two plants shown. Notice that this curve is linear. In the graph, if all the resources are used to produce Schools then there will be no Hospitals. Use the production possibilities model to distinguish between full employment and situations of idle factors of production and between efficient and inefficient production. 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. 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. The slope equals −2 pairs of skis/snowboard (that is, it must give up two pairs of skis to free up the resources necessary to produce one additional snowboard). Where will it produce the calculators? Output began to grow after 1933, but the economy continued to have vast numbers of idle workers, idle factories, and idle farms. As we include more and more production units, the curve will become smoother and smoother. The fact that the opportunity cost of additional snowboards increases as the firm produces more of them is a reflection of an important economic law. Now suppose that, to increase snowboard production, it transfers plants in numerical order: Plant 1 first, then Plant 2, and finally Plant 3. The next 100 pairs of skis would be produced at Plant 2, where snowboard production would fall by 100 snowboards per month. Clearly, the transfer of resources to the effort to enhance national security reduces the quantity of other goods and services that can be produced. If all the factors of production that are available for use under current market conditions are being utilized, the economy has achieved full employment. In this video I explain how the production possibilities curve (PPC) shows scarcity, trade-offs, opportunity cost, and efficiency. When devoted solely to snowboards, it produces 100 snowboards per month. Suppose two countries are each capable of individually producing two given commodities. Two things could leave an economy operating at a point inside its production possibilities curve. In this example, production moves to point B, where the economy produces less food (FB) and less clothing (CB) than at point A. The economy had moved well within its production possibilities curve. It retains its negative slope and bowed-out shape. Leftward shift of PPF shows the decrease in resources or degradation of technology in the economy. The bowed-out production possibilities curve for Alpine Sports illustrates the law of increasing opportunity cost. Now draw the combined curves for the two plants. When an economy is operating on its production possibilities curve, we say that it is engaging in efficient production. Plant 3, though, is the least efficient of the three in ski production. Would you be able to consume what you consume now? All choices along the curve shows production efficiency of both goods. 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. Production possibility curve shows the different combinations of the production of two commodities that can be achieved in an economy given the resources and technology which are to be fully utilized. Opportunity costs can be found and calculated (when there are numbers) from a production possibilities curve. Specialization implies that an economy is producing the goods and services in which it has a comparative advantage. The decision to devote more resources to security and less to other goods and services represents the choice we discussed in the chapter introduction. The production possibilities curve is also called the PPF or the production possibilities frontier. The opportunity cost of the first 200 pairs of skis is just 100 snowboards at Plant 1, a movement from point D to point C, or 0.5 snowboards per pair of skis.