In the economy, there is a process of constant overflow of factors of production from one industry to another. This is illustrated by a curve called the production possibilities frontier.
Production Capabilities- these are the possibilities for the production of economic benefits with the full and efficient use of all available resources and a given level of development of scientific and technical progress. Limited resources puts a limit on the possibilities of production. Using resources to create one product means forgoing the production of another. It forces you to make a choice; what products to produce, what needs to satisfy in the first place.
The essence of the problem of choice in conditions of limited resources can be understood by using the production possibilities curve (CPV). Production Possibility Curve- a graph showing the whole set of options for using available resources to produce alternative (alternative - allowing one of two or more possibilities) types of products (goods).
Let's take a textbook example. Let us suppose that a society needs the production of two products, butter and guns. Possible production volumes of two products at full use limited resources are presented in table 5. Putting two products on the coordinate axes and connecting the points that reflect different combinations of production volumes of these products, we get a production possibilities curve (see figure 12).
Table 5 - Alternative possibilities for the production of butter and guns
Figure 12 - Production Possibility Curve
The points on the production possibilities curve show all possible combinations of production of two products with full use of available resources and unchanged technology.
An analysis of the reduced production possibilities curve makes it possible to formulate a number of important economic propositions.
1. The law of substitution, which states that with full use of resources and unchanged technology, an increase in the production of one product leads to a reduction in another. Moving along the production possibilities curve, indeed, we see that with an increase in oil production, the output of guns decreases, and vice versa.
To illustrate the operation of the law of substitution, one often cites following examples. In the USSR on the eve of the Great Patriotic War(1941 - 1945) there was full employment, all labor resources fully utilized, there was no unemployment. When the war began, it was possible to increase the production of military products only by reducing the production of civilian products. In the United States before the war (1939), labor resources were underused, unemployment reached 17.2%. When did the second World War, the United States was able to increase the production of both military and civilian products. By 1944, unemployment had fallen to 1.2%.
2. If the economy is at the point N, this means that the available resources are not fully used: there is an opportunity to increase the production of both guns and oil. Dot N indicates underproduction and inefficient use of resources.
3. Point M with given resources and available technology for production is unattainable. But this does not mean at all that production possibilities cannot increase.
4. Any production is efficient, if it ensures the full use of resources, i.e. if an increase in the production of one product leads to a decrease in the production of another product. Therefore, any point on the production possibilities curve is efficient.
Let us assume that the firm has a certain machine park and a certain amount workers and produces two products. If the machine park is fully used, all workers are loaded, then in order to increase the production of one product, it will be necessary to reduce the production of another. If it is possible to increase the production of one product without reducing the production of another, this means that the available resources are underused, i.e. production is inefficient.
5. Since an increase in the production of one product leads to a reduction in the production of another, the production costs of one product can be expressed in the amount of another product, the production of which has to be abandoned in connection with the production of the first. Thus, the increase in oil production from zero to 2 million tons "cost" 3 thousand guns, the production of which had to be abandoned. It can be said that additional 2 million tons of oil cost 3 thousand guns. In economics, such a cost or such cost of production is called opportunity or imputed.
Summarizing what has been said, we can draw the following conclusion: The main economic problems of society: what to produce? how to produce? for whom to produce? - can be reformulated as follows:
1. What should be the optimal structure of the economy?
2. How to achieve efficiency?
3. How to ensure the welfare of the population?
What to produce is decided by the market, for producers produce those goods from the sale of which they expect to receive the maximum possible profit.
Any product must be produced in such a way that it is in demand among the population, so that its price covers the costs of its production and makes a profit, i.e. the manufacturer uses those means of production that allow him to save costs as much as possible. This is the answer to the question how to produce.
The Italian economist Walfredo Pareto wrote that resources can be considered efficient, and therefore optimally distributed for a given level of opportunity, when no market participant can improve its position without thereby worsening the position of others. This distribution is called Pareto efficient, or Pareto-optimal distribution.
Suppose that the imaginary economy consists of only two individuals: Fedor and Tryphon. If the well-being of Fedor is plotted along the horizontal axis, and Tryphon's well-being is plotted along the vertical axis, then it is possible to build a line of "borders of possible wealth" . It should be noted here that the image specific type possible welfare boundaries are just some possible variant to illustrate the concept. Give the exact quantification well-being of a particular individual or to quantify the well-being different people hardly seems possible. The use of the concept of "Pareto-optimality" suggests the possibility of determining the direction of change in the well-being of individual individuals.
Figure 13 – Frontier of Possible Wealths
In the figure, the OAKVS figure represents the set of possible welfares of two individuals. What determines the position of this line? It is determined by the available production resources and the nature of the production technology used. If, suppose, the amount of applied resources has increased or the applied technology has improved, then this will obviously lead to a shift of the frontier of possible welfares upwards to the right, thereby increasing the set of possible available welfares. Note that under given conditions, a given amount of resources and technology used, the combination of two welfares at point Z is unattainable. Unlike Z, welfare D is achievable. But this state of the economy is not Pareto optimal. Why? Since the well-being at points K, B, E of at least one of the individuals is higher than at point D, and the well-being of the other is not lower. Thus, Pareto - optimal are all points that lie on the border of AKVS.
The possible welfare frontier may have a different configuration than that shown in Figure 13. Consider Figure 14. In it, the possible welfare frontier is depicted by the line ABCDE. The Pareto-optimal state of the economy corresponds to the points on the segments BC and DE, that is, only the points located on the convex sections of the frontier of possible welfare.
Figure 14 - Possible configuration of the possible welfare frontier
Let us introduce the concept of "Pareto-preference". The state of the economy L is called Pareto - preferable in relation to state T, if in state L the well-being of at least one individual is higher, and for all the others it is not lower than in state T. In Figure 14, points K , B, E are Pareto-preferred with respect to point D. However, point K is not such with respect to point E. At the same time, point K is Pareto-optimal, and point E is not. At the same time, point E is not Pareto-preferential with respect to point K. In general, the Pareto-preference relation cannot be applied to any pair of economic states. This relation is applicable only in the case when a given pair of points in the welfare space of two individuals can be connected by a segment with a non-negative slope. The concept of "Pareto-optimality" is related to the concept of "Pareto-preference". A Pareto-optimal state of the economy can be defined as one in relation to which among the achievable states of the economy there is no Pareto-preferable state.
We need these concepts in microeconomic analysis, first of all, because they explicitly take into account the discrepancy between the interests of various economic agents: what is good for one may be bad for another, and vice versa. They make it possible to order the achievable states of the economy in order of preference. This can be illustrated as follows: for example, if one economic mechanism brings the economy to state B (figure), and another - to D, then the advantage of the first over the second is quite obvious. One of the requirements for the construction of an economic mechanism is that it must bring the economy to a Pareto-optimal state or close to it. It is easy to see that there are infinitely many Pareto-optimal states - they are all points that belong to the AKBC line. The definition of the best of this set belongs to the sphere of public choice. However, microeconomic theory develops ways to move the economy from a Pareto-optimal, but “socially unfair” state, such as, for example, at point K to figure, to a state close to point B, which is “more fair”, since at point K Tryphon is much better than Fedor, who bathes in luxury.
Having become acquainted with the factors of production, we now turn to the question of their use for the production of various goods and services. The production capabilities of society depend on what the specific "allocation" of resources in the economy will be. For Russia, this problem is more than relevant. In socialist times, in the vast and then still richest Soviet Union, few people think about severe limitation and interdependence of economic resources society. Infinitely increasing the output of, say, combine harvesters at Rostselmash, business executives did not want to notice that this was taking away from the country the opportunity to at least alleviate the situation with the shortage of household vacuum cleaners and refrigerators.
The Problem of Choice and the Production Possibilities Frontier
So between needs people and opportunities to satisfy them there is an "unpleasant" but inevitable Feedback: if the former are unlimited, then the latter are very limited. From here, people constantly get up problem of choice. Even in everyday life, at every step we solve puzzles like "what is better": eat your favorite ice cream or buy an interesting book? In economics, this problem manifests itself in the need to choose between alternatives : what goods should be produced, and which will have to be abandoned. For limited resources mean limited production. By focusing, for example, on the production of "cannons", the society will inevitably be forced to reduce the production of "butter". This brings us to the concept of production possibilities.
Production Capabilities– this is what maximum amount goods and services (in a certain set of them), which can be produced simultaneously for a given period, given resources and technologies. This means that all available resources (labor, means of production and other economic factors) are used most fully and efficiently.
For clarity, consider conditional example. It is known that each economy produces two large groups products: means of production (production goods) and consumer goods ( consumer goods). Let in our example, for simplicity, they are collectively represented by machines and books. The general scarcity of resources allows the production of these goods per year, for example, in the following alternative ratios: either (A) 10 units of machine tools with zero production of books, or (B) 9 units of machines + 1 unit of books, or (AT) 7 units of machine tools + 2 units of books and so on (Table 2.3). Based on the data in this table, you can build a graph, the curved line of which will reflect production possibilities frontier (HPV) for machines and books in our example (Fig. 2.13). So, point A shows an alternative in which all resources are directed to the production of machine tools, and point D shows a situation where only books are published. However, these are two clearly unrealistic extremes. In fact, society always seeks to find the balance it needs in the distribution of production. points B, C and G just represent alternative options for such a balance, i.e. the maximum possible volume of simultaneous production and machine tools and books in their various combinations. At the same time, more machines means fewer books, and vice versa.
Table 2.3
Possibilities of annual production of books and machines with full use of resources
At the same time, the limited material and human resources make any combination of the production of machine tools and books impossible. outside HPV lines - say, in point H (from the word "impossible") with the release of 2 units of machine tools and 7 units of books. In contrast, production combinations inside HPV (for example, in point M - "possible") are quite real, but at the same time, resources are used incompletely and inefficiently (unloaded factories, low labor force employment in society, low labor productivity, excessive costs of raw materials, etc.). Accordingly, there are reserves for increasing the production of one product without reducing the output of another.
Thus, only points on the production possibilities frontier show the most efficient use of available resources for the production of certain goods and services.
Society should only you
Rice. 2.13.
take their desired combination. In this case, however, one will have to "pay" for the choice made by the so-called imputed (or hidden) costs, to which we now turn.
- Alternative (from lat. alter - one of two) - (1) necessity choosing one of two or more mutually exclusive possibilities; (2) each of these mutually exclusive possibilities.
- Accent (from Latin accentus - stress) - (1) stress in a word; highlighting sound by amplifying it; (2) concentration of attention or efforts on something, emphasis on something; (3) involuntary distortion of sounds by a person speaking a foreign language.
Production possibilities of society. Production Possibility Curve. Technological choice of society
Production possibilities of society is the ability of society to production economic benefits with full and efficient use of all available resources at a given level of technology development. Since resources are limited, society is forced to make a technological choice, deciding which needs should be satisfied and which should not.
Thus, the limited resources determine the alternativeness of their use, necessitates an alternative choice of the most mutually exclusive possibilities. the best option in terms of society's goals. The alternative choice between directions of resource use can be reflected in the form of a production possibilities curve.
Production Possibility Curve shows the maximum possible volume of simultaneous production of two goods with the full use of limited production resources, when at a given level of production and available technology there are no resources to increase the volume of production.
The economy is efficient , when all points of possible combinations of production of two goods are on the frontier of production possibilities (i.e. A, B, C, D, E). The economic system is inefficient , when different combinations of production of two goods are located to the left of the production possibilities frontier (point F).
In this case, society's resources are not fully occupied ( unemployment , incomplete utilization of production capacities, backward technology). Point F represents a combination of goods X and Y that is significantly less than what could be produced with the full and efficient use of available resources. Society must do whatever is necessary to move to the production possibility frontier.
For a society that has a certain stock of resources and knowledge and provides a full volume of production, point G is currently unattainable.
So, any economic system has a limited capacity at any given time and cannot move beyond the production possibilities frontier .
The transition from a seller's market to a buyer's market is a cycle consisting, as a rule, of three stages. The first stage is a period of slow growth in per capita consumption of a particular product. The first stage of the transition cycle corresponds to the Industrial Revolution, preceding the PC. The pace of technological progress at that time was relatively low, and the resource intensity of the products produced was high, which limited the production capabilities of society. During the period of the industrial revolution, demand was also met on a correspondingly limited scale. It should be added to the above that the first stage of the cycle is characterized by the dominance of the seller's market.
Each point on represents some maximum output of the two products. Thus, this curve actually depicts a certain boundary. In order to realize the various combinations of pizza production and robots represented by the points on the production possibilities curve, a society must achieve both full employment and production efficiency. Points inside (left and below) the curve are also achievable, but less desirable than points on the curve. These points reflect a situation where full employment and production efficiency have not been achieved. At points outside the production possibilities curve, such as at point W, the volume of production would be greater than at any point on the curve, but such points are unattainable with a given amount of resources and with a given production technology. The barrier created by limited resources and the current level of technology does not allow any combination of production of capital goods and commodities at a point outside the production possibilities curve.
The production possibilities of society can be used
C. The following causal relationship operates in the economy of society. An increase in the production of economic goods, cash income and consumer demand of the population causes an increase in the level of needs. Is there a limit to the progressive growth of needs? This is largely determined by the production capabilities of society.
In the previous section of the manual, we established that the rise of people's needs directly depends on the available production capabilities of society. Now we have to find out what are the boundaries of these possibilities and the trends in their change.
ECONOMIC NEEDS - These are needs that can be satisfied through the consumption of any goods or services. The desire to have free time is included in the category of economic needs because it is necessary to enjoy the consumption of some material goods or services. Goods are things that can be touched, i.e. physically tangible objects, food, shoes, cars, houses, etc. Services include things that cannot be touched by hands, such as medical care, notary or hairdressing services, education, etc. So, human needs for all these goods and services exceed the productive capacity of society.
Production possibilities of society scarcity, choice, opportunity cost, efficiency
Let's move from conditional comparison to a strict mathematical comparison of the first best and the second best. The Pareto-efficient state lies on the production possibilities frontier of society, and its finding can be viewed as a maximization problem with a constraint
The market sells 4 types of soft drinks. The production possibilities of society are such that the maximum number of varieties of goods is 6. By reducing the number of varieties of soft drink by one unit, it is possible to increase the volume of production of goods of each variety by 2 million liters. Limiting rate of transformation trademarks release is the same. The utility function of society has the form U = NX, where N is the number of varieties of goods, X is the volume of output of each variety Should the state, maximizing social utility, welcome the entry of new sellers into the market or the exit of current firms from the market
When alternative M is chosen, a larger amount of resources will be spent on current consumption, will leave the productive turnover, and, consequently, will be excluded from participation in expanding the production capabilities of society. Accordingly, in a few years the production possibilities curve will only deviate to position A A.
| Rice. 1. The Production Possibility Curve of Society |
However, society does not stand still. Social and economic development is inevitable. Relying on one step of scientific and technological progress, it rises to another, to the next. Accordingly, the production capabilities of society also increase, that is, the boundaries of limited resources are pushed further and further. On the chart, this
How the production possibilities of society change in the context of economic growth
Production possibilities of society with given resources and in conditions of economic growth. The concept of imputed costs and the law of their increase.
Attention should also be paid to the fact that with the current maximum level of production possibilities, society is not able to simultaneously increase both military and civilian production and move to point S. Therefore, the transformation curve in economic theory is often called the production possibility frontier.
THE LAW OF INCREASING RELATIVE COSTS is a law that establishes the relationship between an increase in the production of one product at the expense of a decrease in another. It can operate in the case when the production possibilities of society are close to marginal, resources are limited, and profitability decreases. To increase one kind of product, the production of another is reduced.
| Rice. 12.3. THE PRODUCTION POSSIBILITY CURVE OF SOCIETY. Society can only get more protection from external attack (more guns) by giving up other goods (oil). | /info/148292"> the economy is the same as in problem 3. However, for j shirt production, new method, thanks to which one worker can produce five shirts per day. There has been no improvement in the production of cakes, (a) Show a new society's production possibilities frontier. (b) How does it compare to the previous boundary (c) If consumers choose to have both cakes and shirts, what is the public choice most likely to be about what to produce Economic growth is an increase in the productive capacity of society. It is measured by the growth rate of real GNP in absolute terms or per capita. Depending on the sources of growth, extensive and |
Any economic system faces a dilemma: on the one hand, the needs of society are limitless, completely insatiable; on the other hand, the resources of society necessary for the production of goods are limited or scarce. The problem of limited resources is a fundamental economic problem.
The scarcity of goods means that for any person and society as a whole, most goods and services are limited, that is, not enough to meet all needs. Limited resources means that the production capabilities of society are limited, that is, society is forced to produce a limited amount of goods. Increasing the production of one good, society is forced to reduce the production of another. Choosing one production option, you have to sacrifice other options. Society is faced with a choice of what goods to produce, and which should be discarded. This problem faced all economic systems in the past, today and will face tomorrow.
Using the simplest model, consider the production possibilities of society. Consider a hypothetical economy in which two goods, X and Y, are produced. Let us also assume that the amount of resources and the technology of production are constant. Let us assume that the given economic system is efficient, i.e., operates under conditions of full employment of resources and full production.
If absolutely all resources are directed to the production of good X, then society will receive the maximum amount of it. In this case, the good Y will not be produced at all (option A). Another alternative is possible, when all the resources of society are directed to the production of goods Y. In this case, the good Y is produced in the maximum quantity, and the good X is not produced (option B). However, society needs both goods at the same time, for which it is necessary to reduce the production of each of these goods below the maximum. In this case, there are many alternative options for production combinations of resources and the corresponding structure of production (for example, options C, D, E). This situation can be represented graphically. We plot the amount of good X horizontally, and the good Y vertically. As a result, we get the production possibilities curve. Each point on this curve represents a certain combination of goods of two kinds. For example, point C represents a combination of Xc pcs. item X and Yc pcs. product Y.
Production Possibility Curve shows" the maximum possible volume of simultaneous production of two goods with given resources and technologies available to a given society.
The economy is efficient, when all points of possible combinations of production of two goods are on the frontier of production possibilities (i.e. A, B, C, D, E). The economic system is inefficient, when different combinations of production of two goods are located to the left of the production possibilities frontier (point F). In this case, society's resources are not fully occupied (unemployment, underemployment production capacity, backward technology). Point F represents a combination of goods X and Y that is significantly less than what could be produced with the full and efficient use of available resources. Society must do whatever is necessary to move to the production possibility frontier. For a society that has a certain stock of resources and knowledge and provides a full volume of production, point G is currently unattainable. Any economic system at any given time has a limited capacity and cannot move beyond the production possibilities frontier.
The problem of choice is the main problem associated with limited resources. However, limited resources lead to the emergence of several more. Such problems are competition, rationing and discrimination. Since there are many options for using resources, and the number of these resources is limited, competition inevitably arises. Competition- economic rivalry of commodity producers, aimed at obtaining at their disposal the largest amount of resources. Rationing- a distribution system that establishes the maximum amount of a good or resource that an economic unit can acquire. Rationing is a way of allocating a good or resource whose supply is less than demand. In a free market, this situation does not arise. At one time, rationing was widely practiced in our country, which, since 1917, has experienced various types of shortages and subsequent rationing. As an exceptional measure, rationing also takes place in the economies of developed countries. For example, in the United States during World War II, it was quite effective. Discrimination- Restriction or deprivation of access to any benefits of certain categories of citizens on the basis of race, nationality, social origin, political views, etc. An example may be discrimination in the labor market.
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