The additional education is measured by the horizontal distance between B and C. The foregone healthcare is given by the vertical distance between B and C.
This is the opportunity cost of the additional education. The budget constraints presented earlier in this chapter, showing individual choices about what quantities of goods to consume, were all straight lines. The reason for these straight lines was that the slope of the budget constraint was determined by relative prices of the two goods in the consumption budget constraint. However, the production possibilities frontier for healthcare and education was drawn as a curved line.
Why does the PPF have a different shape? At point A, all available resources are devoted to healthcare and none are left for education. This situation would be extreme and even ridiculous. For example, children are seeing a doctor every day, whether they are sick or not, but not attending school. People are having cosmetic surgery on every part of their bodies, but no high school or college education exists.
Now imagine that some of these resources are diverted from healthcare to education, so that the economy is at point B instead of point A. Diverting some resources away from A to B causes relatively little reduction in health because the last few marginal dollars going into healthcare services are not producing much additional gain in health.
However, putting those marginal dollars into education, which is completely without resources at point A, can produce relatively large gains. For this reason, the shape of the PPF from A to B is relatively flat, representing a relatively small drop-off in health and a relatively large gain in education. Now consider the other end, at the lower right, of the production possibilities frontier.
Imagine that society starts at choice D, which is devoting nearly all resources to education and very few to healthcare, and moves to point F, which is devoting all spending to education and none to healthcare. For the sake of concreteness, you can imagine that in the movement from D to F, the last few doctors must become high school science teachers, the last few nurses must become school librarians rather than dispensers of vaccinations, and the last few emergency rooms are turned into kindergartens.
The gains to education from adding these last few resources to education are very small. However, the opportunity cost lost to health will be fairly large, and thus the slope of the PPF between D and F is steep, showing a large drop in health for only a small gain in education.
The lesson is not that society is likely to make an extreme choice like devoting no resources to education at point A or no resources to health at point F. Instead, the lesson is that the gains from committing additional marginal resources to education depend on how much is already being spent.
If on the one hand, very few resources are currently committed to education, then an increase in resources used can bring relatively large gains.
On the other hand, if a large number of resources are already committed to education, then committing additional resources will bring relatively smaller gains. This pattern is common enough that it has been given a name: the law of diminishing returns , which holds that as additional increments of resources are added to a certain purpose, the marginal benefit from those additional increments will decline. When government spends a certain amount more on reducing crime, for example, the original gains in reducing crime could be relatively large.
But additional increases typically cause relatively smaller reductions in crime, and paying for enough police and security to reduce crime to nothing at all would be tremendously expensive.
The curvature of the production possibilities frontier shows that as additional resources are added to education, moving from left to right along the horizontal axis, the original gains are fairly large, but gradually diminish. Similarly, as additional resources are added to healthcare, moving from bottom to top on the vertical axis, the original gains are fairly large, but again gradually diminish. In this way, the law of diminishing returns produces the outward-bending shape of the production possibilities frontier.
The study of economics does not presume to tell a society what choice it should make along its production possibilities frontier. In a market-oriented economy with a democratic government, the choice will involve a mixture of decisions by individuals, firms, and government.
However, economics can point out that some choices are unambiguously better than others. This observation is based on the concept of efficiency. In everyday usage, efficiency refers to lack of waste. An inefficient machine operates at high cost , while an efficient machine operates at lower cost, because it is not wasting energy or materials. An inefficient organization operates with long delays and high costs, while an efficient organization meets schedules, is focused, and performs within budget.
The production possibilities frontier can illustrate two kinds of efficiency: productive efficiency and allocative efficiency. Figure 2 illustrates these ideas using a production possibilities frontier between healthcare and education. Productive efficiency means that, given the available inputs and technology, it is impossible to produce more of one good without decreasing the quantity that is produced of another good.
As a firm moves from any one of these choices to any other, either healthcare increases and education decreases or vice versa.
However, any choice inside the production possibilities frontier is productively inefficient and wasteful because it is possible to produce more of one good, the other good, or some combination of both goods.
For example, point R is productively inefficient because it is possible at choice C to have more of both goods: education on the horizontal axis is higher at point C than point R E 2 is greater than E 1 , and healthcare on the vertical axis is also higher at point C than point R H 2 is great than H 1. The particular mix of goods and services being produced—that is, the specific combination of healthcare and education chosen along the production possibilities frontier—can be shown as a ray line from the origin to a specific point on the PPF.
Output mixes that had more healthcare and less education would have a steeper ray, while those with more education and less healthcare would have a flatter ray. Allocative efficiency means that the particular mix of goods a society produces represents the combination that society most desires. How to determine what a society desires can be a controversial question, and is usually discussed in political science, sociology, and philosophy classes as well as in economics.
At its most basic, allocative efficiency means producers supply the quantity of each product that consumers demand. Only one of the productively efficient choices will be the allocatively efficient choice for society as a whole.
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Simply state. Marginal standing facility MSF is a window for banks to borrow from the Reserve Bank of India in an emergency situation when inter-bank liquidity dries up completely. This content is taken from Coventry University online course,. You can do this however you like — you might like to use software you have access to, or draw it by hand and take a photo.
Part 1: Produce a PPF graph for the trade-off between transport and other goods, like the one above, and annotate key parts of it with explanations of what it represents. For example:. What effect does this have on the PPF graph? Draw these changes in, and add explanations of how it affects the points you labelled. For help using Padlet, see below. You will then be able to either upload what you have discovered or link to a URL that is available in your browser address bar. For more information on how to post, please visit the Padlet website.
If you have trouble uploading your visual representation, you may try to use another wall or create a link of what you have created, which you can post in the comments area below, along with your comments. By following any of the links to Padlet, you will be taken to a third-party website. On this website, you may be asked to submit some information about yourself. Please make sure you are familiar with the terms and conditions and privacy policy of the third-party website before submitting your information.
Whether you follow the links and submit your personal information or not, your course progress will in no way be affected. This content is taken from Coventry University online course. Share this post. See other articles from this course.
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