production possibility curve examples questions answers pdf

The Shape of the PPF and the Law of Diminishing Returns This is the opportunity cost of the additional education. The slope of the PPF between B and C is (approximately) the vertical distance (the “rise”) over the horizontal distance (the “run”). The foregone healthcare is given by the vertical distance between B and C. The additional education is measured by the horizontal distance between B and C.

Whether or not we have specific numbers, conceptually we can measure the opportunity cost of additional education as society moves from point B to point C on the PPF. When you think of improvements in healthcare, you can think of longer life expectancies, lower levels of infant mortality, and fewer outbreaks of disease. However, when you think of improvements in education, you can think of accomplishments like more years of school completed, fewer high-school dropouts, and higher scores on standardized tests. An additional reason for the lack of numbers is that there is no single way to measure levels of education and healthcare.

If this were a real world example, that data would be available. 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. The second is the absence of specific numbers on the axes of the PPF. In contrast, the PPF has a curved shape because of the law of the diminishing returns. This is because its slope is given by the relative prices of the two goods. The first is the fact that the budget constraint is a straight line. There are two major differences between a budget constraint and a production possibilities frontier. What’s the difference between a budget constraint and a PPF? By now you might be saying, “Hey, this PPF is sounding like the budget constraint.” If so, read the following Clear It Up feature. Just as with Alphonso’s budget constraint, the opportunity cost is shown by the slope of the production possibilities frontier.

What would the opportunity cost be for the additional education? The opportunity cost would be the healthcare society has to give up. Suppose it considers moving from point B to point C. Because the PPF is downward sloping from left to right, the only way society can obtain more education is by giving up some healthcare.

Suppose society has chosen to operate at point B, and it is considering producing more education. Most important, the production possibilities frontier clearly shows the tradeoff between healthcare and education. But it does not have enough resources to produce outside the PPF. Society can choose any combination of the two goods on or inside the PPF. In effect, the production possibilities frontier plays the same role for society as the budget constraint plays for Alphonso. Alternatively, the society could choose to produce any combination of healthcare and education shown on the production possibilities frontier. If it were to allocate all of its resources to education, it could produce at point F. But it would not have any resources to produce education. If the society were to allocate all of its resources to healthcare, it could produce at point A. In Figure 1, healthcare is shown on the vertical axis and education is shown on the horizontal axis. At D most resources go to education, and at F, all go to education. At A all resources go to healthcare and at B, most go to healthcare. This production possibilities frontier shows a tradeoff between devoting social resources to healthcare and devoting them to education. Education Production Possibilities Frontier. This situation is illustrated by the production possibilities frontier in Figure 1. Suppose a society desires two products, healthcare and education. As you read this section, focus on the similarities.īecause society has limited resources (e.g., labor, land, capital, raw materials) at any point in time, there is a limit to the quantities of goods and services it can produce. There are more similarities than differences between individual choice and social choice. This section of the chapter will explain the constraints faced by society, using a model called the production possibilities frontier (PPF). Just as individuals cannot have everything they want and must instead make choices, society as a whole cannot have everything it might want, either. Contrast productive efficiency and allocative efficiency.Explain the relationship between a production possibilities frontier and the law of diminishing returns.Contrast a budget constraint and a production possibilities frontier.Interpret production possibilities frontier graphs.By the end of this section, you will be able to:

Production possibility curve examples questions answers pdf