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| | Nearly 5% of CLEP exam is devoted to questions about "production possibilities." These are easy points to earn. | | 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. | + | "Production possibilities, or "Possibilities of production," means all the different combinations of goods a nation can produce. The United States can produce X cars and Y trucks, 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 (below), 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 “production possibilities 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. | | If the overall number of workers or investment capital increased, then you could produce more of everything. The entire production possibilities graph (or “production possibilities 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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| | *there are only two goods, and production is a trade-off between the goods: making more of one means making less of the other. | | *there are only two goods, and production is a trade-off between the goods: making more of one means making less of the other. |
| | + | *the economy is efficient and there is no waste; if there is waste, then the point of production is somewhere inside the curve rather than on it. |
| | *the same fixed resources are used for making the same two goods, and technology does not improve | | *the same fixed resources are used for making the same two goods, and technology does not improve |
| | *there is "full employment," such that adding workers requires taking them away from another task | | *there is "full employment," such that adding workers requires taking them away from another task |
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| | + | If there are inefficiencies in a nation's economy, then its production will be inside the production possibilities curve. Due to the inefficiencies, the nation will not be producing as much as it could if it were efficient. Just as an increase in capital or an improvement in technology can cause an increase in the production of all goods, an increase in a nation's efficiency can cause its production to increase for all goods, from a point inside the production possibilities curve to a point on the curve. |
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| | Sometimes in politics the trade-off between producing goods 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. | | Sometimes in politics the trade-off between producing goods 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. | + | 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 8 hours sleeping, 1 hour exercising, 1 hour traveling to destinations, 3 hours cooking and eating, 6 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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| | == Comparative Advantage == | | == Comparative Advantage == |