![]() ![]() The Shape of the PPF and the Law of Diminishing Returns This is the opportunity cost of the additional education. The slope of the PPF between B and C is (approximately) the vertical distance (the âriseâ) over the horizontal distance (the ârunâ). The foregone healthcare is given by the vertical distance between B and C. We measure the additional education by the horizontal distance between B and C. Whether or not we have specific numbers, conceptually we can measure the opportunity cost of additional education as society moves from point B to point C on the PPF. If this were a real world example, that data would be available. There are no specific numbers because we do not know the exact amount of resources this imaginary economy has, nor do we know how many resources it takes to produce healthcare and how many resources it takes to produce education. The second major difference is the absence of specific numbers on the axes of the PPF. Thus, the slope is different at various points on the PPF. ![]() ![]() In contrast, the PPF has a curved shape because of the law of the diminishing returns. This is because its slope is given by the relative prices of the two goods, which from the point of view of an individual consumer, are fixed, so the slope doesn't change. The first is the fact that the budget constraint is a straight line. There are two major differences between a budget constraint and a production possibilities frontier. Whatâs the difference between a budget constraint and a PPF? By now you might be saying, âHey, this PPF is sounding like the budget constraint.â If so, read the following Clear It Up feature. Just as with Alphonsoâs budget constraint, the slope of the production possibilities frontier shows the opportunity cost. What would the opportunity cost be for the additional education? The opportunity cost would be the healthcare society has to forgo. Suppose it considers moving from point B to point C. Because the PPF is downward sloping from left to right, the only way society can obtain more education is by giving up some healthcare. Suppose society has chosen to operate at point B, and it is considering producing more education. Most importantly, the production possibilities frontier clearly shows the tradeoff between healthcare and education. However, it does not have enough resources to produce outside the PPF. Society can choose any combination of the two goods on or inside the PPF. In effect, the production possibilities frontier plays the same role for society as the budget constraint plays for Alphonso. Alternatively, the society could choose to produce any combination of healthcare and education on the production possibilities frontier. If it were to allocate all of its resources to education, it could produce at point F. However, it would not have any resources to produce education. If the society were to allocate all of its resources to healthcare, it could produce at point A. At D most resources go to education, and at F, all go to education.įigure shows healthcare on the vertical axis and education on the horizontal axis. At A all resources go to healthcare and at B, most go to healthcare. Education Production Possibilities Frontier This production possibilities frontier shows a tradeoff between devoting social resources to healthcare and devoting them to education. The production possibilities frontier in Figure illustrates this situation.Ī Healthcare vs. Suppose a society desires two products, healthcare and education. As you read this section, focus on the similarities.īecause society has limited resources (e.g., labor, land, capital, raw materials) at any point in time, there is a limit to the quantities of goods and services it can produce. There are more similarities than differences between individual choice and social choice. This section of the chapter will explain the constraints society faces, using a model called the production possibilities frontier (PPF). Just as individuals cannot have everything they want and must instead make choices, society as a whole cannot have everything it might want, either. The Production Possibilities Frontier and Social Choices Overview Confronting Objections to the Economic Approach.The Production Possibilities Frontier and Social Choices.How Individuals Make Choices Based on Their Budget Constraint.Introduction to Choice in a World of Scarcity.The Production Possibilities Frontier and Social Choices The Use of Mathematics in Principles of Economics.Exchange Rates and International Capital Flows.The Aggregate Demand/Aggregate Supply Model.The International Trade and Capital Flows.
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