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The economic problem and Production Possibility Curve

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by Shayne LaPlante on 2 September 2013

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Transcript of The economic problem and Production Possibility Curve

The Economic Problem and Production Possibility Curve
Finite resources (Land, Labour, Capital and Enterprise); hence we have to make choice among the economic goods we can have as we can not fulfill all our needs and wants.

However, we have
free goods
such as air that are available in abundance. But we can argue for air not being free as there is a cost to clean air pollution that we cause through human activity of transportation and generation of electricity. Further, the flourishing oxygen bar business in Japanese cities from that provide customers fresh air for a charge.
The problem...
Choice
The best way to understand the choices we make in life is to look at a family budget. We have limited money lets say $2,000 and our
needs
our to pay the mortgage installment as we need house to shelter us from weather, weekly food bill to feed ourselves, utility bills (gas, electricity and water) to cook and other basic activities. However, the family
wants
to go for a holiday to Spain and it will cost $1,800. You have to make a decision to either pay your monthly bills or to go for the holiday. Whichever you choose then the other will become your opportunity cost as you have given up one for the other.

In the above case I would choose to pay my monthly bills as they are my needs and if I made any extra money lets say from doing weekend jobs then I would fulfill my want of going to Spain. Hence my opportunity cost in this case would be Spain. The opportunity cost varies for everyone as some people may earn more.
Analysing in economics
Short Term Vs Long term:
In economics the time period has important considerations. For e.g. I am a deck and fence builder and the demand for decks has gone up. In the short term I may employ another carpenter working to make decks to meet the demand. However, in the long term (12 to 18 months) if the demand is growing I may hire another crew which may not be possible in the short term (immediately to 9 months). The time period is industry specific. In petroleum industries in North sea what would be short term and long term?
Technology
In Canada technology has had a significant impact upon the factors of production (Labour and Capital); such as the labour productivity has gone up for e.g. earlier in Lablaws you needed 1 cashier for each check out till but now you have one cashier managing 10 - 12 self check out tills. Furthermore, in Auto industry the use of Computer Aided Designing & Computer Aided Manufacturing you need less labour this mean technology also results in unemployment.

Technology has also integrated the financial markets and allowed the movement of capital between countries. A good e.g. you can buy shares online.
The production possibility Curve

(PPC)
Let's steal a British example:
Since we (or any country) have limited resource we can only produce limited goods with them and have to be very wise of not producing goods that are not needed. This concept can be explained by the use of PPC. To understand it lets assume in Britain with the given resources we can only produce two goods British Beef and British Chicken.

The PPC shows the different combinations of both the goods we can produce.
In diagram 1:
The current PPC of the economy is
red curve.

At Point A we can produce 60 unit of british beef and 20 units of british chicken or at point B we can produce 50 units of british chicken and 30 units of british beef.
Point C is inside the PPC, this means there is under-utilisation of resources and less goods are being produced. This is spare capacity in the economy and in short term if there is increase in demand of goods then production can be increased.
Point D is outside the current PPC and on the blue PPC meaning more output and that may be possible if the technology has improved labour productivity or an increase in the resources for production.
In diagram on the PPF is concave because of varying opportunity cost. This means that the resources cannot be perfectly substituted among each other due to specialisation. All teachers can not be good doctors and all good doctors cannot become good teachers.

In diagram 2:
The PPC curve is a straight line because the opportunity cost is constant. The resources are perfectly substituable at a constant rate. This may be due to lack of specialisation.
1
2
Concave PPC
Straight Line PPC
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