The output would increase, and the PPF would be pushed outwards. A new curve, represented in the figure below on which Y would fall, would show the new efficient allocation of resources. When the PPF shifts outwards, it implies growth in an economy. When it shifts inwards, it indicates that the economy is shrinking due to a failure in its allocation of resources and optimal production capability. A shrinking economy could be a result of a decrease in supplies or a deficiency in technology.
An economy can only be produced on the PPF curve in theory. In reality, economies constantly struggle to reach an optimal production capacity. And because scarcity forces an economy to forgo some choice in favor of others, the slope of the PPF will always be negative.
That is, if the production of product A increases then the production of product B will have to decrease. The Pareto Efficiency states that any point within the PPF curve is inefficient because the total output of commodities is below the output capacity. Conversely, any point outside the PPF curve is impossible because it represents a mix of commodities that will require more resources to produce than are currently obtainable.
Therefore, in situations with limited resources, only the efficient commodity mixes are those lying along the PPF curve, with one commodity on the X-axis the other on the Y-axis. Consider a hypothetical world that has only two countries Country A and Country B and only two products cars and cotton.
Suppose that Country A has very little fertile land and an abundance of steel. Country B has an abundance of fertile land but very little steel. If Country A were to try to produce both cars and cotton, it would need to split its resources and put a great deal of effort into irrigating its land to grow cotton.
That would mean it can produce fewer cars, which it is much more capable of doing. The opportunity cost of producing both cars and cotton is high for Country A.
Similarly, for Country B, the opportunity cost of producing both products is high because of the effort required to produce cars given its lack of steel. An economy may be able to produce for itself all of the goods and services it needs to function using the PPF as a guide.
However, this may actually lead to an overall inefficient allocation of resources and hinder future growth when the benefits of trade are considered.
Through specialization , a country can concentrate on the production of just a few things that it can do best, rather than trying to do everything on its own. Each country in our example can produce one of these products more efficiently at a lower cost than the other. We can say that Country A has a comparative advantage over Country B in the production of cars, and Country B has a comparative advantage over Country A in the production of cotton. Or, both countries could decide to specialize in producing the goods for which they have a comparative advantage.
Each can trade its specialized product to the other and both countries will be able to enjoy both products at a lower cost. Quality will improve, too, since each country is making what it makes best.
Determining how countries exchange goods produced by comparative advantage "the best for the best" is the backbone of international trade theory. This method of exchange via trade is considered an optimal allocation of resources.
It means that national economies, in theory, will no longer be lacking anything that they need. Like opportunity cost, specialization and comparative advantage also apply to the way in which individuals interact within an economy.
At least in modern times, few people try to produce everything they consume. Sometimes a country or an individual can produce more than another country, even though countries both have the same amount of inputs. For example, Country A may have a technological advantage that, with the same amount of inputs good land, steel, labor , enables the country to easily manufacture more of both cars and cotton than Country B. Now the equilibrium in the economy is the extreme point on the x-axis on the curve showing maximum of computers and no wheat.
Hence all the labor who were suited for wheat will happily start to produce wheat, and the economy will have equilibrium at D with half wheat and half computers. Here the gain in wheat by half labor allocation is area A on y-axis and loss computers by half allocation of labor is area C on x-axis.
It seem quite logical that area A will be greater than area C, as wheat producers who were producing computers where not as efficient in producing computers and when they left to product wheat, the loss of computers was not that big. Now again government introduces the policy to produce wheat only, this means allocating the computer producers are moved to produce wheat.
The equilibrium will be the extreme point on the y-axis on the curve where there will be maximum wheat and no computers. Here the gain in wheat by allocating remaining half labor is area E on the y-axis and the loss in computers by shifting remaining half labor to wheat is area B on x-axis.
Now it is also logical to see the gain E is smaller than loss B, because we already employed the efficient ones for wheat the remaining labor which are employed now were efficient for computers, so they are not as suitable to produce wheat.
You are commenting using your WordPress. You are commenting using your Google account. This means that standards of living can increase by more than they would have if the economy had not made the short-term sacrifice.
An economy can grow because of an increase in productivity in one sector of the economy — this is called asymmetric growth. For example, an improvement in technology applied to industry Y, such as motor vehicles, but not to X, such as food production, would be illustrated by a shift of the PPF from the Y-axis only.
If workers, or other resources, are moved from one sector to another, then the position of the PPF will change, with an increase in the maximum output in the industry receiving the resources, and a fall in the maximum output of the industry losing resources. Stagflation is a combination of high inflation, high unemployment, and stagnant economic growth. Because inflation isn't supposed to occur in a weak economy, stagflation is an unnatural situation. Slow growth prevents inflation in a normal The laissez-faire economic theory centers on the restriction of government intervention in the economy.
According to laissez-faire economics, the economy is at its strongest when the government protects individuals' rights but otherwise doesn't intervene.
What Is Adverse Selection? Adverse selection is a term that describes the presence of unequal information between buyers and sellers, distorting the market and creating conditions that can lead to an economic collapse.
It develops Explaining The K-Shaped Economic Recovery from Covid A K-shaped recovery exists post-recession where various segments of the economy recover at their own rates or levels, as opposed to a uniform recovery where each industry takes the same Both on paper and in real life, there is a solid relationship between economics, public choice, and politics.
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