What does the slope of the PPF mean? Remember that the slope of a line is a ratio that shows the rate of change of the y variable compared to the x variable. We produced more electronics without sacrificing any food, so the economy is strictly better off – a Pareto improvement has been made. In this case, the same amount of food (on the horizontal axis) is produced, but more electronics are produced (vertical axis). This can be easily seen by starting at any point under the line and moving vertically until the line is reached. In this case, a Pareto improvement can be made by shifting the production mix to any point on the line, where all available inputs are being used. This is because the economy must leave some of its available resources unused to reach a point under the line. The problem with them is that they are inefficient. This is efficient in an economic productivity sense.īut, every non-negative point under the line is also a possible product mix. At every point on the line shown, the economy is using all of its available labor hours to produce some mix of the two goods. One useful aspect of the PPF is that it helps us easily see if an economy has reached a Pareto efficient outcome. Taken together, these facts will produce the following PPF: That is, regardless of whether we make 1 unit of food or 1000 units of food, it always takes one labor hour to make 10 units of food. Now, let’s assume that the amount of labor hours required to produce these goods is constant at all levels of production. If we graph food on the horizontal axis and electronics on the vertical axis, then the x-intercept will be 1000 and the y-intercept will be 500. These two points become the intercepts on the PPF graph. If the economy has a total endowment of 100 labor hours, then it can produce 1000 units of food or 500 units of electronics by spending all 100 hours on either good. The economy’s production can be represented in the following table: Let’s further assume that the only production inputs in this economy are the labor hours required to produce the goods. To demonstrate with a simple example, let’s consider an economy that produces food and electronics. In other words, you must know how many units of good A you must give up in order to produce one more unit of good B at all levels of total production. To create the PPF, you need to know the opportunity cost of producing each good. Moving further along one axis means the economy produces more of that good. The PPF is often defined for two different goods that utilize the same inputs in their production this can be shown on the vertical and horizontal axes of a graph. It shows possible combinations of two (or more) products that an economy can make, in one simple graph – hence the name. In the choice between T and S, can you say which one is better, and why?į.The Production Possibilities Frontier (PPF) is a graph that can be used to describe the production of an economy in macroeconomics, or production decisions by a household or firm in microeconomics. In the choice between T and R, decide which one is better. Which choices show allocative efficiency? How can you tell?ĭ. Which choices display productive efficiency? How can you tell?Ĭ. Sketch a graph of a production possibility frontier with environmental quality on the horizontal axis, measuredīy the number of trees, and the quantity of economic output, measured in corn, on the vertical axis.ī. Table 12.11 shows possible combinations of economic output and environmental protection.Ī. To clear some of Sherwood’s forest and grow corn, but obtaining this additional economic output will have an environmental cost from reducing the number of trees. A country called Sherwood is very heavily covered with a forest of 50,000 trees.
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