can any one tell me in a simple manner
why is a ppf curve concave ?
can any one tell me in a simple manner
why is a ppf curve concave ?
A concave PPF curve implies that resources are not "perfectly adaptable", meaning that increasing production of one good sacrifices production of another in a non-linear fashion.
A priest, a paladin and Varimathras walk into a bar...
Opportunity Costs
The presence of scarcity means that at some point in time we’ll have to make some choices. The result of making a choice is that some other opportunities will have to be sacrificed for others.
Example: Every time you choose to study one more hour of economics requires you to give up the opportunity to do any of the following activities:
1. Study another subject
2. Listen to Music
3. Sleep
4. Go shopping
5. Read a book
6. Work Out
Because there were so many alternatives to choose, how do you determine the value of what you gave up for an extra hour of economics study?
There is no exact answer to this and each person has a different value system. Each one of us has to come up with a subjective estimate to the expected value for the next best alternative.
The value of the next best alternative is called an opportunity cost. In economics cost is always in the value of the alternative choices. You choosing to study one more hour of economics is measured in the opportunity cost of the next highest-ranking alternative, NOT the value of all other alternatives.
The way to think about opportunity costs is to think about what you lose by doing something.
PRODUCTIONS POSSIBILITIES FRONTIER (PPF)/CURVE (PPC)
Example 1: Consider that you are taking two classes (Economics and Sewing).
Each hour that you study helps your grade but you only have 10 hours total to study for both classes. Some choices must be made then.
The curve shows the all “potential” outcomes from your choices. Straight line PPF is a special case of the PPF.
Keep in mind that we are keeping every other factor constant. Same study aids and ability to score well.
Example 2: Consider the example where you have a world that produces one of two kinds of goods (CD Factory, Bottled Water).
Capital available is able to produce both goods but usually can produce one good better than the other.
Assumptions:
1. Resources are fully utilized.
2. Analysis is regarding production over a set period of time.
3. The resource inputs, in both quantity and quality, used to produce both goods are fixed over time.
4. Technology doesn’t change during this analysis.
a. Available applied knowledge that is used to produce goods.
Being off the PPF is possible if you are inside the curve. But this is not efficient. What this means is that the country is not maximizing it’s potential. This usually occurs in times of unemployment.
Realistically you would like to be on the PPF. But in real world scenarios this is usually not the case.
Tradeoff vs Free Lunch
Tradeoff – movement along the PPF
Free Lunch – From inside the PPF to some point on the fontier
Being outside the PPF is impossible in this scenario because of assumption #1.
The PPF is considered to be all possible efficient combinations. Anywhere on the PPF is considered to be efficient from a production standpoint.
Efficiency occurs whenever we are producing the maximum output with given technology and resources.
If we are caught at a point that is inside the productions possibilities frontier we can become efficient by either increasing the production of good X, good Y or a combination of both.
Law of Increasing Relative Cost
The trade off between a grade in economics and one in sewing was found to be a 1 to 1 ratio (fixed). This is usually not the case once again but just a simplified example to gain intuition.
As we give up more and more of one good to produce more of another we see that the amount we have to give up for each additional unit of good Y to make more of good X increases.
When society takes more resources and applies them to the production of any specific good, the opportunity cost increases.
Resources are not perfectly adaptable (even human capital).
As a rule of thumb, the more specialized the resources, the more curved the PPF.
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"Nobody beats Vitus Gerulaitis 18 times in a row." - Vitus Gerulaitis on beating Jimmy Connors after 17 failed attempts.
You forgot: Visit GotApexOriginally posted by brainsmile
Opportunity Costs
Example: Every time you choose to study one more hour of economics requires you to give up the opportunity to do any of the following activities:
1. Study another subject
2. Listen to Music
3. Sleep
4. Go shopping
5. Read a book
6. Work Out
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