In this unit, RB2: Production-Possibilities Curve/Frontier, you will learn about the following:
*What is Opportunity Cost? *What is a Constant Cost Production-Possibilities Graph (Linear)? *What is Increasing Cost Production-Possibilities Graph (Concaved to the Origin)? *What is Absolute Advantage? *What is Comparative Advantage? *What is Specialization? *What is Considered to be a Good Terms of Trade?
The Production-Possibilities Curve/Frontier describes the concept of opportunity cost at several levels. We will start by looking at an orchard where you have a choice of planting either an apple tree or an orange tree. If you plant an apple tree in one spot, you can't plant an orange tree in that same spot. So the opportunity cost of an apple tree is an orange tree.
From the examples above, you saw that you cannot plant an apple tree where an orange tree is growing. To plant an apple tree, you must give up planting an orange tree and visa versa. So the opportunity cost of one orange tree is one apple tree. This is an example of a Constant Cost Production-Possibilities Frontier/Curve.
However, let's say that you can plant two apple trees where only one orange tree can grow. Then the opportunity cost of one orange tree = two apple trees. It can also be stated that the opportunity cost of one apple tree = 1/2 orange tree.
If the resources change or there is a change in the efficiency of the use of the resources, then the entire production-possibilities curve SHIFTS.
If you can remember the following five changes in resources, then you can determine that the production possibilities curve has also changed.
1. Change in the productive labor force (productivity). 2. Change in the quantity and quality of natural resources. 3. Change in the quantity and quality of capital stock (factories, equipment, machinery, etc.) 4. Change in health and education. 5. Change in technology.
So a change in any above, shifts the production-possibilities frontier/curve outward.
On the table below take your cursor or finger and click on the number of apples and number of oranges columns to see what the opportunity cost of one apple is for one orange and visa versa.
TEST YOUR KNOWLEDGE:
On the table below, drag the appropriate term inside the BLUE rectangle to the appropriate column's GREEN rectangle. If you are correct, the term will stay inside the GREEN rectangle. If you are incorrect, the term will bounce back to its original position.
After dragging the term to the correct yellow rectangle, show the effect by using the graph to the right. For your answers you will either drag the PPF curve inward or outward or drag the dot(s) onto the graph.
What is Opportunity Cost?
What is a Constant Cost Production-Possibilities Graph (Linear)?
What is an Increasing-Cost Production-Possibilities Graph (Bowed Outward)?
Wherever there are increasing costs, the production-possibilities frontier/curve is bowed out from the origin. Moving either way up or down the axes, the cost of moving from one point on the curve to another point on the curve is increasing. Looking at the two increasing cost production-possibilities frontiers below, click on the next button to understand the concept of increasing costs.
Steven M. Reff Economics Lecturer University of Arizona (2007 - 2016) The 2015 University of Arizona Five-Star Faculty Award
Long-run Economic Growth Occurs When the PPF Shifts Outward.
Each apple tree produces 10 apples and each orange tree produces 10 oranges. Follow the directions below the graph.
You have just seen if resources are fixed (in this case--land), then you can operate either ON the production-possibilities curve if you are at full potential (using the resource of land as EFFICIENTLY as possible) or INSIDE the production-possibilities curve if you are BELOW full potential (using the resource of land INEFFICIENTLY). You have also learned that you cannot get to a point OUTSIDE the production-possibilities curve with the fixed amount of resources (land, in this case) at this particular point in time.
In this unit on the Production-Possibilities Curve/Frontier you have learned about the following:
*Opportunity Cost *Constant Cost Production-Possibilities Graph (Linear) *Increasing Cost Production-Possibilities Graph (Concaved to the Origin) *Absolute Advantage *Comparative Advantage *Specialization *Terms of Trade
Using the information below the graphs, show the correct answer on the graph to the left by dragging the A or B dots or the entire curve. When you are finished doing that, draw your answers on the graph to the right.
TEST YOUR KNOWLEDGE:
1. Efficient Use of Resources 2. Unattainable on Your Own 3. Inefficient Use of Resources 4. Simultaneous increase in Both X & Y 5. To produce one efficiently, you give up more of the other
6. Specialization and Trade 7. Efficient & Simultaneous decrease in X & Y 8. Inefficient and Increase production of only Good Y 9. Efficient and Decrease production of only Good X