![]() The economy can make more computers for any given number of cars.Īs a result, the production possibilities frontier shifts outward. If a technological advance in the computer industry raises the number of computers that a worker can produce per week. The production possibilities frontier shows the tradeoff between the production of different goods at a given time. And, each car the economy gives up yields only a small increase in the number of computers. In this case, the resources best suited to making computers are already in the computer industry. The economy gets a substantial increase in the number of computers for each car it gives up.īy contrast, when the economy is using most of its resources to make computers, the production possibilities frontier is quite flat. When the economy is using most of its resources to make cars, the production possibilities frontier is quite steep.īecause even workers and machines best suited to making computers are being used to make cars. This means that the opportunity cost of cars in terms of computers depends on how much of each good the economy is producing. Notice that the production possibilities frontier in the above graph is bowed outward. In other words, when the economy is at point A, the opportunity cost of 200 computers is 100 cars. When society reallocates some of the factors of production from the car industry to the computer industry, moving the economy from point A to point C, it gives up 100 cars to get 200 additional computers. The production possibilities frontier shows the opportunity cost of one good as measured in terms of the other good. When the economy moves from point A to point C, for instance, society produces more computers but at the expense of producing fewer cars.Īnother Principles of Economics is that the cost of something is what you give up to get it. Once we have reached the efficient points on the frontier, the only way of getting more of one good is to get less of the other. The production possibilities frontier shows one tradeoff that society faces. One of the Ten Principles of Economics is that people face tradeoffs. Increasing production of both cars (to 700) and computers (to 2,000). If the source of the inefficiency were eliminated, the economy could move from point B to point A. It is producing only 300 cars and 1,000 computers. Perhaps, widespread unemployment, the economy is producing less than it could from the resources it has available. Point B represents an inefficient outcome for some reason. 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. ![]() Points on (rather than inside) the production possibilities frontier represent efficient levels of production. But it cannot produce at points outside the frontier.Īn outcome is efficient if the economy is getting all it can from the scarce resources it has available. In other words, the economy can produce at any point on or inside the production possibilities frontier. The economy does not have enough of the factors of production to support that level of output. It could produce 700 cars and 2,000 computers, shown in the graph above by point A.īy contrast, the outcome at point D is not possible because resources are scarce. If the economy were to divide its resources between the two industries. The two endpoints of the production possibilities frontier represent these extreme possibilities. If all resources were used in the computer industry, the economy would produce 3,000 computers and no cars. In this economy, if all resources were used in the car industry, the economy would produce 1,000 cars and no computers. ![]() Above graph is an example of a production possibilities frontier curve.
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