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# 3 (9) - 26 pan 1 WHAT IS ECONOMICS nouns 2-1 The Production...

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Unformatted text preview: 26 pan 1 WHAT IS ECONOMICS? nouns 2-1 The Production Possibility Frontier The production possibility frontier illustrates the trade-offs facing an economy that produces two goods. It shows the maximum quantity of one good that can be produced given the quantity of Feasible and _ the other good produced. Here. the maximum 9593?”! 1'" : feasible quantity of coconuts that Tom can gather production depends on the quantity of ﬁsh he catches. and vice versa. His feasible production is shown by the area inside or on the curve. Production at point C is feasible but not efﬁcient. Points A and : P d ti 3 are feasible and efﬁcient in production. but _“ not eﬁ‘icient ‘8? . : .L‘lsifm‘t’; point D is not feasible. : I 3 frontier i ' - PPF 20 40 Quantity of fish A certainly gather 9 coconuts. However, a production point that lies outside the fron- tier—such as the hypothetical production point D. where Torn catches 4-0 fish and gathers 30 coconuts—isn’t feasible. (In this case, Tom could catch 40 fish and gather no coconuts or he could gather 30 coconuts and catch no ﬁsh, but he can’t do both.) In Figure 2-1 the production possibility frontier intersects the horizontal axis at 40 fish. This means that if Tom devoted all his resources to catching fish. he would catch 40 fish per week but would have no resources left over to gather coconuts. The pro- duction possibility frontier intersects the vertical axis at 30 coconuts. This means that if Tom devoted all his resources to gathering coconuts. he could gather 30 coconuts per week but would have no resources left over to catch fish. The ﬁgure also shows less extreme trade-offs. For example, if Tom decides to catch 20 ﬁsh, he is able to gather at most 15 coconuts; this production choice is illustrat- ed by point A. If Tom decides to catch 28 ﬁsh, he can gather at most only 9 coconuts, as shown by point B. Thinking in terms of a production possibility frontier simplifies the complexities of reality. The real-world economy produces millions of different goods. Even a cast- away on an island would produce more than two different items (for example, he would need clothing and housing as well as food). But in this model we imagine an economy that produces only two goods. By simplifying reality, however, the production possibility frontier helps us under- stand some aspects of the real economy better than we could without the model: effi- ciency, opportunity cost, and economic growth. Efficiency First of all. the production possibility frontier is a good way to illustrate the general economic concept of efﬁciency. Recall from Chapter 1 that an economy is efficient if there are no missed opportunities—there is no way to make some people better off without making other people worse off. One key element of efficiency is that there are no missed opportunities in produc- tion—there is no way to produce more of one good without producing less of other goods. As long as Tom is on the production possibility frontier. his production is effi- cient. At point A, the ‘15 coconuts he gathers are the maximum quantity he can get given that he has chosen to catch 20 ﬁsh; at point B, the 9 coconuts he gathers are the maximum he can get given his choice to catch 28 fish; and so on. If an economy is producing at a point on its production possibility frontier. we say that the economy is eﬁicient in production. ...
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