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Basic Economics with Taxation and Agrarian Reform

(SOCSCI 4) Production Possibilities Schedule


HANDOUT NO.3
Production Sacks of Rice Sacks of
I.BASIC ECONOMICS Combination Corn
CHAPTER 2: The Central Concept of Economics A 240 0
B 200 10
B. PRODUCTION POSSIBILITIES CURVE AND FRONTIER C 170 20
D 150 30
PRODUCTION POSSIBILITIES CURVE
It is a graph which depicts the concept of opportunity cost by
showing production trade-offs between two goods on hypothetical PROBLEM:
economy. Mang Mario is a typical farmer of high variety of palay using the method of
inorganic farming. He owns 1 hectare of a parcel of land located in
B.1 Production Possibilities Schedule Zamboanga del Norte. He is able to harvest 240 cavans of palay every year.
It pertains to a tabular form of the data showing the
combination of these production possibilities. 1 cavan = 50 kilos
50 kilos of rice are the weight of rice placed in 1 (one) sack.
To establish the use of this economic model, the following
assumptions are made: (Keyword: ROSE) When Mang Mario attended a seminar conducted by the Department of
Agriculture, he was deeply impressed by the potential of the corn industry that
1. The Economy is working at maximum efficiency. he was persuaded to introduce the planting of corn into his farm land.
2. There are Only two (2) goods being produced in the
economy. (This is the inherent limitation of a However, Mang Mario wants to take a calculated risk by not foregoing the
graphical tool.) planting of palay. Thus, he asked for an advice from his friend named Mr.
3. Same resources are being used in the production of Aedler, an Agronomist. If you were Mr. Aedler, what will be your advice to
these two goods, and may be shifted to produce Mang Mario?
more of one good, or more of another.
4. Resources and technology are fixed.

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Now, try to plot the production possibilities for this schedule by putting the
RICE production in the vertical axis and the production of CORN in the
horizontal axis.

Chapter 2: Production Possibilities Curve and Frontier Page 1


Q2: At what production point does Mang Mario maximize the use of his land
for corn production? What is his yield at this point?
Production Point: ________
Yield of Rice: ________
Yield of Corn: ________

Q3: At what production point does Mang Mario maximize the use of his land
for rice production? What is his yield at this point?
Production Point: ________
Yield of Rice: ________
Yield of Corn: ________

Q4: At what production point does Mang Mario experience an equal


production of rice and corn?
Production Point: ________
Yield of Rice: ________
Yield of Corn: ________
Plot the production points in the graph and label each production point with the
corresponding capital letter listed in the Production Possibilities Schedule.
Based from the aforesaid information, Production Possibilities Curve or
PPC pertains to the graph (which almost always appears to be a curve) shows
the maximum units of combined goods that may be produced. Any production
point below or on the curve is normally possible in the economy.

Each point on the PPC represents some maximum output of the two products.
The curve is a production frontier because it shows the limit of attainable
output.

At point A, the economy would be devoting all of its resources in the


production of RICE while point D, all of its resources would be utilized for the
production of CORN. Moving from alternative A to D, production of corn
increases at the expense of production of rice.

Chapter 2: Production Possibilities Curve and Frontier Page 2


 Transformation Curve – some consider it as PPC since it allows Reason:
the economist to see the necessary trade-off to transform one PPF encompasses all production possibilities in a given economy.
good into the other, in terms of the units that need to be foregone. This means that all points in the graph, below, on and above the PPC should
be considered in the PPF. This is why it is called the frontier – up to where
 Marginal Rate of transformation (also called Marginal production is possible, even if extraordinarily done.
Opportunity Cost) – Time and time again, production has been proven to increase without
It is simply the slope of the production possibilities curve at any necessarily changing fixed resources such as land and capital. Technological
given point. It describes numerically the rate at which one good interventions and better production process methodologies have contributed to
can be transformed into the other. the production expansion.

Marginal Opportunity Cost of a commodity –


It is the opportunity cost of one good in terms of the other good at Ways to extend the production possibilities:
the margin. This marginal rate is usually expressed in a ratio 1. Specialization;
between one good in exchange for the other good. 2. International Trade
3. Infusion of Modern Technology
 Opportunity Cost or Trade-off –
The computed value of the next best alternative that is given up  Principle of Specialization
when a choice is made given a set of choices. It may also be PROPONENT: Adam Smith, Father of Economics.
understood as a cost of resource, measured by the next-best,
alternative use of that resource. He established that Specialization occurs when a country decides to
concentrate its resources to produce only one good. The result of this
 Law of Increasing Opportunity Costs/ Law of Increasing decision and action is that the number of units produced tends to be
Trade Offs – higher than the normal production possibility. This happens due to the
As more and more units of the other good has been decided to be increased knowledge, experience and expertise of the workers in a
produced, more and more units of the other good have to be particular economy, and the consequent decrease in their wastage,
sacrificed to continue producing more of the original good being time and effort in the production process.
considered.
Specialization is also a principle that drives nations to trade with one
B.2 Production Possibilities Frontier or PPF another.

It represents all possible production combination of goods that may be  Law of Absolute Advantage
produced with limited resources. When one country is able to produce a good while the other countries
cannot, it obviously puts the producing country at an absolute
Although presented in the same graph as the PPC, PPF should not be thought advantage in terms of producing that good. Said law is fathered by
of or concluded as being the same with PPC. Adam Smith.

Chapter 2: Production Possibilities Curve and Frontier Page 3


However, when two (2) countries can produce two (2) different 4. Productivity- An amount of output per unit of a given input. It is the
products, and each country can produce one product cheaper than amount of products that may be derived given the units of production
the other, it is usually better for a country to specialize on the cheaper inputs.
product to produce, and use this trade with another country for the
more expensive product. When this trade occurs, we term it as
International Trade OR a trade between two countries for CONCLUSION:
different products. The more PPC grows, the more the economy also grows, and the more
products become available for its people. The PPC therefore is a very simple
tool for every economy to determine if it is actually managing its own scarcity
 Law of Comparative Advantage issues properly or not.
PROPONENT: David Ricardo, Father of International Trade and also
a former student of Adam Smith. REFERENCE:
Azarcon, Marzo, Navarro, Ressureccion, Paca, Degay, Sison and Rojo.
A law which describes a situation wherein one country seems to have Principles of Economics with Taxation and Agrarian Reform, 2nd Edition
an advantage in producing one product cheaper than the other
country, and trades these cheaper products for the more expensive
ones. NOTE: Topic for Wednesday!

IMPORTANT KEY WORDS:  READ - CHAPTER 3: Decision Making in Economics


1. Efficiency – the amount of input needed to produce the output. A. Basic Economic Questions
The more efficient an economy is, the less inputs are needed to B. Basic Economic Activities
produce the same level, if not a higher level of output. For an C. Factors of Production and their corresponding payments
economy to become efficient, it should be able to achieve full D. Common Economic Goals of Countries Economic Systems
employment or full use of its resources, and/or attain full production.
Efficiency may be attained allocatively or productively.  SCHEDULE FOR WEDNESDAY:
Four (4) Students will be assigned to discuss A, B, C and D
2. Allocative Efficiency – It is attained when firms produce those goods respectively.
or services most valued or most demanded by society. This means
scarce resources are allocated to the production of the goods and  SCHEDULE FOR FRIDAY:
services so that consumer wants and needs are met in the best way Written Recitation/Long Quiz
possible. Coverage: Chapters 2 and 3
3. Productive Efficiency – It may be attained when an economy uses
the least amount of resources to produce a given good or service or
output is being produced at the lowest possible unit cost.

Chapter 2: Production Possibilities Curve and Frontier Page 4

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