We have seen
that every society has some limited resources, which can be used to produce a
variety of goods and services. The scarcity of these resources implies that the
capacity of the society to produce goods and services to meet its needs is
limited. If we assume that all goods desired by the society can be classified
into consumption and capital goods, we can derive a production possibilities
table and graph illustrating the various combinations of both goods the society
can produce. This is exactly what we have done in Fig. 1-2. Our production
possibilities table and graph are drawn on the following assumption.
that every society has some limited resources, which can be used to produce a
variety of goods and services. The scarcity of these resources implies that the
capacity of the society to produce goods and services to meet its needs is
limited. If we assume that all goods desired by the society can be classified
into consumption and capital goods, we can derive a production possibilities
table and graph illustrating the various combinations of both goods the society
can produce. This is exactly what we have done in Fig. 1-2. Our production
possibilities table and graph are drawn on the following assumption.
The society has a fixed amount of
resources. These resources are both fixed in quantity and quality.
resources. These resources are both fixed in quantity and quality.
There is full resource employment
and productive efficiency full employment as we shall find out in later chapter
eight, does not imply that all resources are fully employed. It only means that
those who are willing and able to work at the on-going wage rate are employed.
Productive efficiency means that the two goods are being produced in the least
costly way. The production technique employed is such that ensures that the
goods produced at minimum cost.
and productive efficiency full employment as we shall find out in later chapter
eight, does not imply that all resources are fully employed. It only means that
those who are willing and able to work at the on-going wage rate are employed.
Productive efficiency means that the two goods are being produced in the least
costly way. The production technique employed is such that ensures that the
goods produced at minimum cost.
Finally, it is assume that the
technology employed in the production of the two goods is constant (or fixed)
for the period under consideration.
technology employed in the production of the two goods is constant (or fixed)
for the period under consideration.
Since the society’s wants are
unlimited, it will naturally want an unlimited quantity of both goods. In other
words, the society would desire to consume at points further and further away
to the upper right outside its production possibilities curve. Note, for
example, that at point to the right of the curve, more of both capital and
consumption goods are produced and consumed compared to any point on the curve.
unlimited, it will naturally want an unlimited quantity of both goods. In other
words, the society would desire to consume at points further and further away
to the upper right outside its production possibilities curve. Note, for
example, that at point to the right of the curve, more of both capital and
consumption goods are produced and consumed compared to any point on the curve.
However, the productive capacity of
the nation is constrained by the production possibilities curve. The curve
defines the potential or full employment output of the society for the given
defines the potential or full employment output of the society for the given
period, that is, the highest quantity of both goods that can be produced given
full employment and productive efficiency.
the nation is constrained by the production possibilities curve. The curve
defines the potential or full employment output of the society for the given
defines the potential or full employment output of the society for the given
period, that is, the highest quantity of both goods that can be produced given
full employment and productive efficiency.
While it is not possible for the
actual output of both goods produced by the society in a given period to be greater
than the potential output, it is possible and indeed common (as we shall see
later in this text) for actual output to fall short of potential output. At any
point within the production possibilities curve (e.g. point to the left of the
curve) actual output is less than potential output. The meaning of this is that
some resources are either unemployed or underemployed. Underemployment of
resources is a situation of resource of resource misallocation, i.e. when resources
are not used to the best advantage of a society, such as when a university graduate
takes on commercial bus driving as an employment. The society can produce and
enjoy more of the two goods by employing all resources in their most productive
uses, that is, by moving to any point on the curve. A movement to point for example, yield a combination of 12,000,000
units of consumer goods and 300 units of capital goods compared to point that
yields 9,000,000 units of consumer goods and 160 units of capital goods. Now,
assume the society decides to produce only capital goods. Evidently, the
maximum units that can be produced if all resources are optimally utilized are
400 units. By the same token, the utilization of all resources can produce a
maximum of 25,000,000 units of consumption goods.
actual output of both goods produced by the society in a given period to be greater
than the potential output, it is possible and indeed common (as we shall see
later in this text) for actual output to fall short of potential output. At any
point within the production possibilities curve (e.g. point to the left of the
curve) actual output is less than potential output. The meaning of this is that
some resources are either unemployed or underemployed. Underemployment of
resources is a situation of resource of resource misallocation, i.e. when resources
are not used to the best advantage of a society, such as when a university graduate
takes on commercial bus driving as an employment. The society can produce and
enjoy more of the two goods by employing all resources in their most productive
uses, that is, by moving to any point on the curve. A movement to point for example, yield a combination of 12,000,000
units of consumer goods and 300 units of capital goods compared to point that
yields 9,000,000 units of consumer goods and 160 units of capital goods. Now,
assume the society decides to produce only capital goods. Evidently, the
maximum units that can be produced if all resources are optimally utilized are
400 units. By the same token, the utilization of all resources can produce a
maximum of 25,000,000 units of consumption goods.
The production possibilities table
shows the various combinations of two goods that can be produced with a fixed
amount of resources assuming there is full employment and productive
efficiency. The production possibilities curve (PPC) (also called production
possibilities boundary, production possibilities frontier or transformation
curve) is the graph of the production possibilities table.
shows the various combinations of two goods that can be produced with a fixed
amount of resources assuming there is full employment and productive
efficiency. The production possibilities curve (PPC) (also called production
possibilities boundary, production possibilities frontier or transformation
curve) is the graph of the production possibilities table.
The various possible combinations of the two goods are
shown as point on the curve, such as a, b, c….f. to be on any point on the
curve, the society must achieve full employment and productive efficiency.
Points inside the curve, such as f reveal situations of unemployment or/and
productive inefficiency, while points outside the curve, such as g, reveal
unattainable combinations of the two goods. The PPC is concave reflecting the
law of increasing opportunity cost.
Given
that the society is at the full employment level and operating at a point on
the curve, such as c, to produce more of capital goods would imply that the
quantity of consumption goods produced must fall. In other words, an increase
in the quantity of capital goods can only be achieved at the expense of some
reductions in the quantity of consumption goods. If, for example, the society
is to increase the units of capital goods consumed from 200 to 300, then it
must be willing to give up 8,000, 000 units of consumption goods. (This
translates to a movement from point c to d on the curve).
that the society is at the full employment level and operating at a point on
the curve, such as c, to produce more of capital goods would imply that the
quantity of consumption goods produced must fall. In other words, an increase
in the quantity of capital goods can only be achieved at the expense of some
reductions in the quantity of consumption goods. If, for example, the society
is to increase the units of capital goods consumed from 200 to 300, then it
must be willing to give up 8,000, 000 units of consumption goods. (This
translates to a movement from point c to d on the curve).
The
units of consumption goods that were traded–off for the extra 100 units of
capital goods reveal the opportunity cost to society of the extra units of
capital goods produced. The same analysis applies the other way. Given that the
society is on any point on the production possibilities curve, more consumption
goods can only be produced at the expense of some given units of capital goods.
units of consumption goods that were traded–off for the extra 100 units of
capital goods reveal the opportunity cost to society of the extra units of
capital goods produced. The same analysis applies the other way. Given that the
society is on any point on the production possibilities curve, more consumption
goods can only be produced at the expense of some given units of capital goods.
There
is an interesting dimension to this however. As we substitute more and more of
consumption for capital goods, the opportunity cost of producing additional
units of capital goods will tend to rise. Let us look again at Fig. 1-2,
assuming we are on point b, where 100 units of capital goods and 23, 000, 000
units of consumption goods are produced. Now assume that the society is to move
from point b to c. The opportunity cost for extra 100 units of capital goods
produced is the 3, 000, 000 units of consumption goods forgone. Put
differently, we have traded off 30, 000 units of consumption goods for one
extra unit of capital goods. Assume that the society decides to further invest
more and consume less by producing more of capital goods, and hence, moves to
point d. This movement will involve trading off 8, 000, 000 units of consumption
goods for 100 extra units of capital goods (or exchanging 80, 000 units of
consumption goods for one unit of capital goods!).
is an interesting dimension to this however. As we substitute more and more of
consumption for capital goods, the opportunity cost of producing additional
units of capital goods will tend to rise. Let us look again at Fig. 1-2,
assuming we are on point b, where 100 units of capital goods and 23, 000, 000
units of consumption goods are produced. Now assume that the society is to move
from point b to c. The opportunity cost for extra 100 units of capital goods
produced is the 3, 000, 000 units of consumption goods forgone. Put
differently, we have traded off 30, 000 units of consumption goods for one
extra unit of capital goods. Assume that the society decides to further invest
more and consume less by producing more of capital goods, and hence, moves to
point d. This movement will involve trading off 8, 000, 000 units of consumption
goods for 100 extra units of capital goods (or exchanging 80, 000 units of
consumption goods for one unit of capital goods!).
We
can see that the opportunity cost of producing an extra unit of capital good
has risen (from 30000 to 80000 units of consumption goods). A further movement
from d to e would mean that society would have to give up all remaining
quantities of consumption goods (12, 000, 000 units) to produce extra 100 units
of capital goods. In other words, the opportunity cost of producing an additional
unit of capital good would rise further from 80, 000 units of consumption goods
to 120, 000 units. The conclusion to be drawn from the above examples is quiet
straight forward: the more of a product that is produced, the greater its
opportunity cost to society. Economists call this phenomenon the law of
increasing opportunity cost. It is the law that gives the production
possibilities curve its concave shape. 3, 000, 000 units of consumption goods
divided by 100 units of capital goods gives a ratio of 1 unit of capital goods
to 30000 units of consumer goods. What then is the reason behind the law of
increasing opportunity cost? Why will the opportunity cost of producing
additional units of a product rise as more and more of that commodity is produced
by society? The answer lies in the fact that resources are not perfectly
adaptable to alternative uses. Some humans, natural and capital resources are
more suitable for the production of a particular commodity than others.
can see that the opportunity cost of producing an extra unit of capital good
has risen (from 30000 to 80000 units of consumption goods). A further movement
from d to e would mean that society would have to give up all remaining
quantities of consumption goods (12, 000, 000 units) to produce extra 100 units
of capital goods. In other words, the opportunity cost of producing an additional
unit of capital good would rise further from 80, 000 units of consumption goods
to 120, 000 units. The conclusion to be drawn from the above examples is quiet
straight forward: the more of a product that is produced, the greater its
opportunity cost to society. Economists call this phenomenon the law of
increasing opportunity cost. It is the law that gives the production
possibilities curve its concave shape. 3, 000, 000 units of consumption goods
divided by 100 units of capital goods gives a ratio of 1 unit of capital goods
to 30000 units of consumer goods. What then is the reason behind the law of
increasing opportunity cost? Why will the opportunity cost of producing
additional units of a product rise as more and more of that commodity is produced
by society? The answer lies in the fact that resources are not perfectly
adaptable to alternative uses. Some humans, natural and capital resources are
more suitable for the production of a particular commodity than others.
Some
land may be more suitable for agricultural purposes. A piece of machine may be
more suited for the production of a particular commodity. Some categories of
labor may be more skilled in a certain area and others in other areas etc. Thus,
when we increasingly push or bend all resources including those most suitable
for other uses into the production of a particular good, the opportunity cost
of producing the good is bound to rise. Given the above analysis, can the society
do anything to increase its production (and consumption) of both capital and
consumption goods? Surely, the society can shift (extend) its production
possibilities frontier. In economic parlance such a shift is called economic
growth; an increase in the capacity of a society to produce more goods and
services, and increase its potential output (shift its production possibilities
curve outward)? We will identify three major factors that may lead to growth.
These are;
land may be more suitable for agricultural purposes. A piece of machine may be
more suited for the production of a particular commodity. Some categories of
labor may be more skilled in a certain area and others in other areas etc. Thus,
when we increasingly push or bend all resources including those most suitable
for other uses into the production of a particular good, the opportunity cost
of producing the good is bound to rise. Given the above analysis, can the society
do anything to increase its production (and consumption) of both capital and
consumption goods? Surely, the society can shift (extend) its production
possibilities frontier. In economic parlance such a shift is called economic
growth; an increase in the capacity of a society to produce more goods and
services, and increase its potential output (shift its production possibilities
curve outward)? We will identify three major factors that may lead to growth.
These are;
1.
Increasing in one
or more of society’s resources
Increasing in one
or more of society’s resources
2.
Reduction in
voluntary unemployment
Reduction in
voluntary unemployment
3.
Technological
progress.
Technological
progress.
Natural
resources can increase when there is a discovery of new resources. When Nigeria
discovered crude petroleum in commercial quantity, the production possibilities
frontier of the nation was massively extended such that the nation now had the
capacity to produce and enjoy more goods and services than it hitherto had.
Similarly, human capital can increase either by a growth in the size of
population or through an increase in the productive capacity of the people.
resources can increase when there is a discovery of new resources. When Nigeria
discovered crude petroleum in commercial quantity, the production possibilities
frontier of the nation was massively extended such that the nation now had the
capacity to produce and enjoy more goods and services than it hitherto had.
Similarly, human capital can increase either by a growth in the size of
population or through an increase in the productive capacity of the people.
This
is why most societies invest in their human resources through the provision of
health, shelter and educational facilities. The process of increasing the productive
capacity of a society’s human resources is called human capital formation.
Finally, the capital stock of the society can be increased by additional
production of capital goods. This is called investment. The process of
increasing the capital stock is called capital formation or capital
accumulation.
is why most societies invest in their human resources through the provision of
health, shelter and educational facilities. The process of increasing the productive
capacity of a society’s human resources is called human capital formation.
Finally, the capital stock of the society can be increased by additional
production of capital goods. This is called investment. The process of
increasing the capital stock is called capital formation or capital
accumulation.
Technology
refers to the method or techniques of production adopted by the society. Hence,
it shows the relationship between what is used inn production (inputs) and the
results (output) obtained. When there is a technological improvement, it means a
better way of producing goods and services has been developed. Hence, more output
can now be obtained from a given amount of inputs. An example is the use of
fertilizer in agriculture. Often societies invest huge amounts in research and
development (R & D) in order to achieve a continuous improvement in
technological know-how. Technological breakthrough, more than any other factor,
has done a great deal in extending the production possibilities frontiers of
advanced countries. In fig. 1-3, economic growth is illustrated in rightward
shifts in the production possibilities curve.
refers to the method or techniques of production adopted by the society. Hence,
it shows the relationship between what is used inn production (inputs) and the
results (output) obtained. When there is a technological improvement, it means a
better way of producing goods and services has been developed. Hence, more output
can now be obtained from a given amount of inputs. An example is the use of
fertilizer in agriculture. Often societies invest huge amounts in research and
development (R & D) in order to achieve a continuous improvement in
technological know-how. Technological breakthrough, more than any other factor,
has done a great deal in extending the production possibilities frontiers of
advanced countries. In fig. 1-3, economic growth is illustrated in rightward
shifts in the production possibilities curve.
