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| | == Production Possibilities == | | == Production Possibilities == |
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| − | Nearly 5% of CLEP. | + | Nearly 5% of CLEP exam is devoted to questions about "production possibilities." These are easy points to earn. |
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| | + | "Production possibilities, or "Possibilities of production," is what it sounds like ... for '''''an entire nation'''''. It means all the different combinations of goods a nation can produce. The United States can produce X cars and Y bundles of wheat, for example. Or it could produce more than X cars and fewer than Y trucks. We could graph the number of cars on the Y-axis and the number of trucks on the X-axis, and draw a “production possibility” curve through all the possible combinations. It would be downward sloping: more cars means less trucks, and vice-versa. The opportunity cost of producing more cars is the loss in production of trucks. In the production possibility curve for cars and boats shown in Figure A (attached), the opportunity cost of moving from point A to point B is 100 cars. |
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| | + | If the overall number of workers or investment capital increased, then you could produce more of everything. The entire production possibilities graph (or “frontier”) would shift upward and to the right. An improvement in technology would have the same effect. An increase in bureaucracy or administrative costs, however, would have the opposite effect, forcing a contraction in overall production. |
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| | + | Sometimes in politics this is described as “guns versus butter.” The more guns (e.g., military weapons) we make, the less butter (e.g., food and domestic services) we can produce. The idea is that there is a trade-off between spending money on our military and spending it on domestic goods and services. |
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| | + | On a personal level, it is usually impossible to do two things at once. Either you spend the next hour working on this course, or you spend it doing something else. You could graph a production possibility curve for how you spend 24 hours each day. It could be 10 hours sleeping, 2 hours playing sports, 3 hours cooking and eating, 4 hours studying, 1 hour relaxing, and 4 hours working at a job. If you take an hour away from one activity, then you can add it to another. Your production possibility curve would represent all the possibilities. |
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| | + | Economists observe that utilizing the Law of Comparative Advantage can improve the production possibilities. Suppose your job paid you $9 but you could hire a cook for $6. Then it might make sense for you to work one more hour and hire someone to save you one hour of cooking. In the absence of taxes, you would be $3 better off. Then you could work one-third of an hour less to make the same money (after expenses) as before. That extra one-third of an hour could be added to your sports or relaxation time. You have moved your “production possibilities frontier” (the curve of all possibilities) outward, for greater benefit. |
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| | + | <include graph> |
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| | == Comparative Advantage == | | == Comparative Advantage == |