Not all land is equally suitable for all production choices. We expect most real-world production processes to exhibit increasing opportunity costs. (If opportunity costs are constant, the PPF will be a straight line). The graph of the PPF will be a curve when increasing opportunity costs are present. not perfectly suited to production of both goods. This is an illustration of the law of increasing opportunity cost.A PPF will exhibit increasing opportunity cost any time resources are specialized, i.e. Notice that the more pies you produce, the higher the cost in terms of sweaters forgone. The cost of the fourth pie is 8 sweaters (because you must reduce sweater production from 8 to 0). The cost of the third pie is 6 sweaters (because you must reduce sweater production from 14 to 8).Notice that the cost of the second pie is 4 sweaters (you reduce sweater production from 18 to 14 in order to produce the 2nd pie so the opportunity cost is 18-14 = 4).The cost of the first pie is 2 sweaters (calculated as 20-18).What do you have to give up in order to get 1 pie? You have to give up 2 sweaters (you have to reduce sweater production from 20 to 18). Start at point A, where you have 0 pies and 20 sweaters. It is also possible to produce a combination of 0 pies and 20 sweaters the letter “A” marks this combination. Note that I have labeled each axis (pies on the horizontal and sweaters on the vertical axis). For example, it is possible to produce a combination of 2 pies and 14 sweaters letter “C” marks this combination. Each combination from the table is marked with its corresponding letter. In the graph space below, I use the data in the table to plot each combination of pecan pies and cardigan sweaters. x-axis) and sweaters on the vertical axis (i.e. For this example, we’ll graph pies on the horizontal axis (i.e. Visualizing the PPF can help us understand the difference between attainable, efficient, and unattainable production combinations and understand the impact of technological change on the relative availability and prices of goods. Although many of the insights of the PPF model can be gleaned from this table, it is often useful to plot this data onto a graph. The remaining combinations listed in the table show how we can use our resources efficiently to produce some of both. If we devote all of our resources to pie production, we can produce 4 pies. According to this table, we can produce 20 sweaters if we devote all of our resources to sweater production. By definition, all of these combinations are “efficient” because they each represent ways of using our resources that produce the maximum combined output of these goods. However, we can choose to divide our resources in ways that produce some of each.Ī production possibilities table lists possible output levels for our pies and sweaters. Moreover, if we devote all of our resources towards sweater production, we cannot produce any pies and if we devote all of our resources towards pie production, we cannot produce any sweaters. Our maximum possible production of these goods depends on our access to these resources as well as the level of technology we have available. Producing pies and sweaters requires resources: land, labor, physical capital, and management. However, the insights from this simplified model are still relevant for our much more complex world. We consider an economy that produces only two goods (here, pies and sweaters, representing food and clothing). The PPF model is a simplified version of the real world. In this example, I’ll show you how to plot the points of the production possibility frontier (PPF), determine whether any given combination is inside, on, or outside the PPF, calculate opportunity cost, and shift the PPF to illustrate the impact of economic growth.
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