The economy of a society is decided by the constant economic feature of scarcity in both demand and supply. Thus, questions to be answered include what goods to produce; how to produce the goods and services selected; identifying consumers of goods and services; how scarce resources can be efficiently utilized; and the consideration of current sacrifices and its essentiality to future economic buoyancy. These questions are necessary because scarcity is an unavoidable element of the economy.
Therefore, the production possibility curve analysis illustrates opportunity costs and trade-offs when producing two specific goods. The model of the production possibility curve analysis portrays the structure of the economy with consideration to scarcity, the efficiency of trade, opportunity costs, and profit from the trade. It also examines the potential of the economy in allocating its limited resources into the productions of profitable and dynamic combinations of goods.
Also, an economy thrives based on factors which are: human labor and resources, capital and natural resources as well as technological advancements and innovations. These are enforced and considered during the illustration from the production possibility curve analysis.
This is a model showing the possible mixture of goods for production in an economy with a specific quantity of resources, technological innovations, and the efficient use of available resources. It is the graphical representation of goods that can be produced and traded in an economy.
The key features of the model are the two axes and each represents each good that an economy produces. The axes are classified into capital goods and consumer goods. While making a graphical representation of the production possibility curve, it’s assumed that only two goods – which are of alternative combination – can economy produce. Also, the needed resources of the factors of production and technology are available and readily fixed for such an economy.
The economy chooses what quantity of alternative combination of goods to produce because certain other productions and trade must be discontinued to have a successful economy. Thus, on each curve of the production analysis, each point will reveal the quantity of each good as manufactured when resources shift from producing more of a good and less of the other. The curve is used to describe a society’s choice between two choices. (Principles of Economics, Minnesota State University).
Investment and consumption are integral to the model. Investment goods involve physical capital and human investment such as skills that are required for the production of further consumption goods. This invests the capital stock of the society.
A point on the curve shows less investment than consumption and another point shows more consumption than investment. By this, a curve reveals possible combinations of products with considerations to available human capital, natural resources, and the technology for goods production. The straight line on the curve shows the constant opportunity costs, and a bowed outline shows an increasing value of the opportunity costs.
The curve summarily shows what specific goods can be produced at a specific period especially if all resources are employed but the institutions and technology are rigid. With this, the society’s output is unraveled and any unemployed factor of production would only result in an inefficient production level.
Consumption is necessary to increase investment because the cost of anything is important in the economy. The opportunity cost can be financial and it could be intangibles like time and value. Opportunity cost is, hence, reflected in a society on the production possibility curve while, if the society finds itself inside the curve, it means resources for the economy aren’t utilized and recession is a scenario to consider in such tragedy. Without the utilization of resources, there is no real opportunity cost which is integral to making the economy work.
Further, to know the opportunity cost of a truck, the properties used in creating it are essential. However, there are intangible costs that could include the smoke pollution from the truck, the congestion it would cause on the street, noise pollution, and/or the unattractive features that are often disregarded. Economists have tried to separate the cost and benefit of economic projects to know their value, but considering essential intangibles, a resolution to the overall value remains undetermined because of intangibles’ complexity.
This law makes the production possibility curve bow outward when a society applies more resources for the production of other goods in the production of specific goods. This leads to an increased opportunity cost through which additional unit productions are used for the specific good. It must be considered that some resources are efficiently used in the production of some goods than they are necessary for other goods.
By this, some resources can be applied in investment goods (land, natural resources) than for consumption goods. This is because resources are adaptable for producing both but while one leads to increased output, the other leads to increased input which could result in inefficient resources for investment.
A society cannot exist outside its production possibility curve, although this curve is flexible. Meaning that the curve can shift as a result of expansion in labor, technology, or capital. The new curve then reveals that as many goods and services can be offered, they can also be consumed and much more produced again. The shift curve is thus a representation of a society’s economic growth.
If a society opts for less consumption and increased investment on the curve graph, its capital resources would increase and an outward shift of the curve will be rapid than if consumption is more than investment. However, there are nations with relatively low consumption yet no significant increase in the curve for economic success. There are also nations with a high consumption rate yet, they experience an increase in investment level.
This implies that other factors account for the notable growth of the economy, and they include improved technology, change of institutions, increased investments and resources, etc. These causes are responsible for the economic development of the United States (with emphasis on its capitalist system).
The production possibility curve can, hence, be perceived to illustrate the law of opportunity cost and increasing cost. Further, it portrays the conditions of scarcity and unlimited wants. It further shows that the growth of the outward curve symbolizes the rapid increase in investment and economy which could allow increased consumption and it’s seen as a potential market solution of production in alternative goods.
However, the production possibility curve is hypothetical as alternative schools of economic posits. This is because the growth experienced isn’t incorporated with any environmental consequence or the expense of such growth. Further, the downside effect of all forms of economic growth isn’t considered. Summarily, the production possibility curve is a theoretical framework to predict and measure the average growth of a society’s economy depending on its available resources and alternative goods for production.
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