Clearly, Brazil has a lower opportunity cost of producing sugar cane (in terms of wheat) than the U.S. It is a situation where the economy can produce more of one product without affecting other production processes. Note: An economy can be productively efficient but have very poor allocative efficiency. Yes, there is a way to explain productive efficiency as one of the components of economic efficiency. The U.S. has comparative advantage in wheat and Brazil has comparative advantage in sugar cane. more goods and services in each successive year. However, additional increases typically cause relatively larger increases in the opportunity cost of reducing crime, and paying for enough police and security to reduce crime to nothing at all would be a tremendously high opportunity cost. In microeconomics, economic efficiency is used about production. An increase in an economy’s productive potential can be shown by an outward shift in the economy’s production possibility frontier (PPF). 2. Thus, the slope of the PPF is relatively flat near the vertical-axis intercept. i.e. The production possibilities frontier in (Figure) illustrates this situation. Suppose two countries, the US and Brazil, need to decide how much they will produce of two crops: sugar cane and wheat. Both show the opportunity cost graphically as the slope of the constraint (budget or PPF). Analysts use production efficiency to determine if the economy is performing optimally, without any resources going into waste. a diagram that shows the productively efficient combinations of two products that an economy can produce given the resources it has available. In a market-oriented economy with a democratic government, the choice will involve a mixture of decisions by individuals, firms, and government. If however it had devoted all of its resources to producing sugar cane instead, it would be producing a much larger amount than the U.S., at point B. What does a production possibilities frontier illustrate? Imagine that society starts at choice D, which is devoting nearly all resources to education and very few to healthcare, and moves to point F, which is devoting all spending to education and none to healthcare. If this were a real world example, that data would be available. (Figure) shows healthcare on the vertical axis and education on the horizontal axis. At A all resources go to healthcare and at B, most go to healthcare. However, any choice inside the production possibilities frontier is productively inefficient and wasteful because it is possible to produce more of one good, the other good, or some combination of both goods. We illustrate this by the PPFs of the two countries in (Figure). Diverting some resources away from A to B causes relatively little reduction in health because the last few marginal dollars going into healthcare services are not producing much additional gain in health. Is it best for capitalism to have someone be able to inherit 50 million dollars tax free simply by being born lucky rich into right family? Allocative efficiency requires productive efficiency, because it pertains to choices along the production possibilities frontier. where marginal costs equal average costs). This situation would be extreme and even ridiculous. Thus, a society must choose between tradeoffs in the present. Biden certification in Congress likely to be contentious, Congress overrides Trump's veto of defense bill, Jennifer Lopez grieves for COVID-19 victims, 'Patriotic Millionaires' want to kick in on relief checks, Packers suffer major loss days before season finale, Cheers! Because of the improvement in technology, the vertical intercept of the PPF would be at a higher level of healthcare. Choice along a given PPF like B, and economic growth is to bundle all goods into two basic,... 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