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October 18, 2018 

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ADJUSTMENT, LONG-RUN AGGREGATE MARKET: Disequilibrium in the long-run aggregate market induces changes in the price level that restore equilibrium. If the price level is above the long-run equilibrium price level, economy-wide product market surpluses cause the price level to fall. If the price level is below the long-run equilibrium price level, economy-wide product market shortages cause the price level to rise. In both cases long-run equilibrium is restored. Price level changes induce changes in aggregate expenditures but NOT changes in real production. The reason is that long-run aggregate supply is full-employment real production, which is unaffected by the price level.

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DERIVATION, PRODUCTION POSSIBILITIES CURVE:

A production possibilities curve, which illustrates the alternative combinations of two goods that an economy can produce with given resources and technology, is often derived from a production possibilities schedule. This derivation involves plotting each bundle from the production possibilities schedule as a point in a diagram measuring the two goods on the vertical and horizontal axes.
Plotting a production possibilities curve from a production possibilities schedule provides useful insight into graphical analysis commonly used throughout the study of economics.

The Plotting Space

Plotting Space
Plotting Space
The first step in the derivation of a production possibilities curve is to set up the plotting space.
  • Each bundle in the production possibilities schedule is a combination of two numbers that can be represented by a point in two-dimensional production possibilities space.

  • The two dimensions of the plotting space displayed here are storage sheds on the horizontal axis and crab puffs on the vertical axis.

  • The horizontal axis is measured between 0 and 11 storage sheds.

  • The vertical axis is measured between 0 and 500 dozen crab puffs.

  • The two axes are joined at the origin.
The mouse arrow can be used to display the various components of the production possibilities plotting space.

Plotting the Points

The next step in converting the production possibilities schedule on the left to the graph on the right is to plot points corresponding to each bundle of sheds and crab puffs into the plotting space.
Production Possibilities
Schedule
Production Possibilities
Curve

  • Bundle A: The first bundle in the schedule (A) consists of 0 sheds and 450 dozen crab puffs. This point can be plotted by finding 0 sheds on the horizontal axis then moving up until the value of 450 dozen crab puffs is reached on the vertical axis. Click the [Plot A] button to identify this point.

  • Bundle B: The second bundle in the schedule (B) is 1 shed and 445 dozen crab puffs. This point can be similarly plotted by finding 1 shed on the horizontal axis then moving up until the value of 445 dozen crab puffs is reached on the vertical axis. Click the [Plot B] button to identify this point.

  • The Rest: All remaining points can be plotted in a similar fashion. To illustrate this click the [Plot All] button. The third bundle and corresponding point (C) is 2 sheds and 437 dozen crab puffs. The fourth bundle and point (D) is 3 sheds and 425 dozen crab puffs. The plotting continues until reaching the last bundle and point (K), which is 10 sheds and 0 crab puffs.

  • The end result of plotting all 11 points is a semi-circular pattern. The pattern of points has a general downward "slope." This indicates the essential tradeoff between the production of sheds and crab puffs. These points represent the "skeleton" of what is called a production possibilities curve.

Connecting the Points

Connecting the Points
The last step in the derivation of the production possibilities curve is to connect the points with a continuous line. The eleven points are only a few of an unlimited number of production alternatives. The line that connects these 11 points includes the other possibilities, an infinite number of production possibilities.
  • To connect the points, click the [Draw] button in the exhibit to the right. This draws a straight line between each pair of adjacent points.

  • However, the actual curve is not a series of jagged line segments, but a smooth curve. To smooth this curve, click the [Smooth] button.

  • The curve is termed the production possibilities curve or the production possibilities frontier.

<= DERIVATION, CONSUMPTION LINEDERIVATION, SAVING LINE =>


Recommended Citation:

DERIVATION, PRODUCTION POSSIBILITIES CURVE, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2018. [Accessed: October 18, 2018].


Check Out These Related Terms...

     | production possibilities | production possibilities curve | production possibilities schedule | opportunity cost, production possibilities | full employment, production possibilities | unemployment, production possibilities | investment, production possibilities | law of increasing opportunity cost |


Or For A Little Background...

     | three questions of allocation | graphical analysis | assumptions, production possibilities | technical efficiency | economic efficiency | opportunity cost | full employment | technology | efficiency |


And For Further Study...

     | economic goals | economic analysis | seven economic rules | distribution standards | scarcity | factors of production | scientific method | economic thinking | fallacies | production cost | law of diminishing marginal returns | short-run production analysis |


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