A PPF graph chooses specific input quantities. As a result, it shows the maximum production level for one commodity for any production level of the other commodity.
PPF is used to define production efficiency. Within a PPF graph, the use of a curve or line acts as a benchmark for measuring efficiency. If a point on the graph is above the curve it indicates efficiency, while a point below the curve signifies inefficiency. For further analysis, additional information is always supplied with a PPF including the period of time taken for the observation, production technologies, and the amounts of inputs that were available.
Economists can use a PPF to illustrate a number of economic concepts including scarcity, opportunity cost, productive efficiency, allocative efficiency, and economies of scale.
When an economy is operating on the PPF curve it is efficient. It is not possible to produce more of one good without decreasing the amount produced for the other good. Likewise, if the economy is operating below the PPF curve, it is inefficient. In this case, the economy can reallocate resources and produce more of both the goods.
The PPF graph shows how resources must be shared among goods during the production process. The points of the graph show the trade -off that takes place between two goods. For example, if more of Good A needs to be produced, the amount of resources in use by Good B must be reduced and transferred to Good A.
The sacrifice in production of Good B is called opportunity cost. All three of the PPF graphs are directly influenced by the opportunity cost. The slope of the PPF shows the rate at which the production of one good can be transferred to another. The slope is called the marginal rate of transformation MRT. Within an economy, if the capacity to produce both goods increases, the result is economic growth. Factors that influence economic capacity include technology, an increase in the supply of factors of production, and production interactions such as trade and exchange.
When any of these factors are used it allows for an increase in capacity so that the production of neither good has to be sacrificed. PPF graphs help economists study the current state of production as well as possible production scenarios.
The output of the economy is impacted by many factors. When production can be graphed and monitored it allows adjustments to be made to work towards attaining economic growth and stability. In economics, a circular flow model is a diagram that is used to represent the monetary transactions in an economy. There are two flows present within the model including flows of physical things goods or labor and flows of money what pays for physical things.
A circular flow model depicts the inner workings of a market system and specific portions of the economy. The basic circular flow model consists of two sectors that determine income, expenditure, and output. This equation means that the expenditure of buyers households becomes income for sellers firms.
The factor owners spend the income on goods which leads to the circular flow of payments. Circular flow of goods income : The circular flow model shows the flow of payments between households and firms.
The circular flow of payments is important within an economy because it 1 measures the national income, 2 provides knowledge of interdependence, 3 illustrates the unending nature of economic activities, and 4 shows injections and leakages.
This circular flow is ongoing between households and firms. The shape of a production possibility curve PPC reveals important information about the opportunity cost involved in producing two goods. When the PPC is a straight line, opportunity costs are the same no matter how far you move along the curve.
When the PPC is convex bowed in , opportunity costs are decreasing. Which of the following is true if the production possibilities curve is a curved line concave to the origin? Resources are perfectly substitutable between the production of the two goods.
It is possible to produce more of both products. The first is the fact that the budget constraint is a straight line. This is because its slope is given by the relative prices of the two goods.
In contrast, the PPF has a curved shape because of the law of the diminishing returns. The second is the absence of specific numbers on the axes of the PPF.
The more guns, the less butter, and vice versa. Adding more workers to the military industry at some point has diminishing marginal returns. Many workers are better as farmers or as soldiers or working building bombs. This specialization gives the PPF curve an outward bowed curve.
It would have a straight line PPF only if every worker were equally productive making butter as making guns. The opportunity cost of shifting farmers into the military industry is the corresponding loss of farm products like butter. Get a free answer to a quick problem. Most questions answered within 4 hours. Choose an expert and meet online.
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