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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.

"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.

"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. 

 

The shape of the production possibilities curve is dictated by the high opportunity cost of trying to convert a nation's factories from making one type of good to making another type.  Imagine having a car factory and a truck factory, and then trying to convert the entire truck factory such that it makes only cars.  At a fixed level of expense, the truck factory is not going to be able to make as many cars as the trucks it was designed to make.  So converting the nation from, for example, a level of 500 cars and 500 trucks to as many cars as possible will probably not be able to reach a level of 1000 cars and zero trucks.  Instead, it will probably top off at a number less than 1000, and hence the tapering of the production possibilities curve near the two axes.

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.