Factors that Affect PPC

29 Apr

UNEMPLOYMENT AND PRODUCTIVE INEFFICIENCY

Almost all nations have at one point(ex. Great Depression) or another experienced widespread unem­ployment of resources. That is, they have operated inside of their production pos­sibilities curves. In the last half of the 1990s, several countries (for example, Argentina, Japan, Mexico, and South Korea) operated inside their production possibilities curves, at least temporarily, because of substantial declines in economic activity. Economies that experience substantial discrimination based on race, ethnicity, and gender do not achieve productive efficiency and thus operate inside their pro­duction possibilities curves. Because discrimination prevents those discriminated against from obtaining jobs that best use their skills, society has less output than otherwise. Eliminating discrimination would move such an economy from a point inside of its production possibilities curve toward a point on its curve. Similarly, economies in which labor usage and production methods are based on custom, heredity, and caste, rather than on efficiency, operate well inside their production possibilities curves.

TRADEOFFS AND OPPORTUNITY COSTS

Many current controversies illustrate the tradeoffs and opportunity costs indicated in movements along a particular production possibilities curve. (Any two categories of “output” can be placed on the axes of production possibilities curves.) Should scenic land be used for logging and mining or preserved as wilderness? If the land is used for logging and mining, the opportunity cost is the forgone benefits of wilderness. If the land is used for wilderness, the opportunity cost is the lost value of the wood and minerals that society forgoes.

Should society devote more resources to the criminal justice system (police, courts, and prisons) or to education (teachers, books, and schools)? If society devotes more resources to the criminal justice system, other things equal, the oppor­tunity cost is forgone improvements in education. If more resources are allocated to education, the opportunity cost is the forgone benefits from an improved criminal justice system.

SHIFTS IN PRODUCTION POSSIBILITIES CURVES

Our World has recently experienced a spurt of new technologies relating to computers, communications, and biotechnology. Technological advances have dropped the prices of computers and greatly enhanced their speed. Cellular phones and the Internet have increased communications capacity, enhancing production and improving the efficiency of markets. Advances in biotechnology, specifically genetic engineering, have resulted in important agricultural and medical discoveries. Many economists believe that these new technologies are so significant that they are con­tributing to faster-than-normal economic growth (faster rightward shifts of the pro­duction possibilities curve).

In some circumstances a nation’s production possibilities curve can collapse inward. An example can be war among Kosovo and Yugoslavia, in the late 1990. Yugoslavia’s economy was hurt because of this war. Allied bombing inflicted great physical damage on Yugoslavia’s production facilities and its system of roads, bridges, and communica­tion. Consequently, Yugoslavia’s production possibilities curve shifted inward.

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