![]() Notice that the opportunity cost of a car equals the slope of the production possibilities frontier. Put another way, the opportunity cost of each car is two computers. That is, at point A, the opportunity cost of 100 cars is 200 computers. When society moves from point A to point B, it gives up 200 computers to get 100 additional cars. The production possibilities frontier shows the opportunity cost of one good as measured in terms of the other good. The cost of something is what you give up to get it. This trade off helps us understand another of the Ten Principles of Economics. When the economy moves from point A to point B, for instance, society produces 100 more cars but at the expense of producing 200 fewer computers. Once we have reached the efficient points on the fromier, the only way of getting more of one good is to get less of the other. The production possibilities frontier shows one trade-off that society faces. One of the Ten Principles of Economics discussed in Chapter 1 IS that people face trade-offs. For example, if the economy moves from point D to point A, its production of cars increases from 300 to 600, and its production of computers increases from 1,000 to 2,200. ![]() If the source of the inefficiency is eliminated, the economy can increase its production of both goods. For some reason, perhaps widespread unemployment, the economy is producing less than it could from the resources it has available It is producing only 300 cars and 1,000 computers. Point D represents an inefficient outcome. When the economy is.producing at such a point, say point A, there is no way to produce more of one good without producing less of the other. the production possibilities frontier represent efficient levels of production. With the resources it has, the economy can produce at any point on or inside the production possibilities frontier, but it cannot produce at points outside the frontier.Īn outcome is said to be efficient if the economy is getting all it can from the scarce resources it has available. Given the technology available for manufacturing cars and computers, the economy simply does not have enough of the factors of production to support that level of output. For example, no matter how resources are allocated between the two industries, the economy cannot produce the amount of cars and computers represented by point C. Or by moving some of the factors of production to the car industry from the computer industry, the economy can produce 700 cars and 2,000 computers, represented by point B.īecause resources are scarce, not every conceivable outcome is feasible. For example, it can produce 600 cars and 2,200 computers, shown in the figure by point A. More likely, the economy divides its resources between the two industries, and this yields other points on the production possibilities frontier. The production possibilities frontier is a graph that shows the various combinations of output in this case, cars and computers that the economy can possibly produce given the available factors of production and the available production technology that firms can use to turn these factors into output. Together, the car industry and the computer industry use all of the economy’s factors of production. ![]() ![]() Here we use one of the simplest such models, called the production possibilities frontier, to illustrate some basic economic ideas.Īlthough real economies produce thousands of goods and services let’s assume an economy that produces only two goods cars and computers. Most economic models, unlike the circular-flow diagram, are built using the tools of mathematics. OUR SECOND MODEL: THE PRODUCTION POSSIBILITIES FRONTIER ![]()
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