Case Study 1
Cold War Relationship Between US and USSR
What would happen if the larger country decided to increase military production? Explain your answer using the concepts of economic efficiency and opportunity costs.
The Production Possibilities Frontier is best described as a line demonstrating the maximum level of production of one good for every production level of some other good. It is a graphical device used to illustrate the concepts of scarcity & how it necessitates choice, as well as opportunity cost. The PPF demonstrates the presence, or possibility of, scarcity and the inability to satisfy all wants.(Investopedia,2012)
If the economy is producing zero civilian goods it can produce 18 military goods. If it increases civilian good production to 10 it can only produce 17 military goods. Every point on the PPF represents an alternate combinations of civilian goods & military goods that this economy can produce if it is operating efficiently or is being productively efficient. When the economy is operating efficiently it can increase production of one type of good only by reducing its production of the other good (switching resources from producing civilian goods to producing military goods). Every point inside the PPF represents alternate combinations civilian goods & military goods this economy can produce without using all of its currently available resources & technology. When the economy is operating inefficiently or being productively inefficient, it can increase production of both types of goods by using its idle resources. Every point outside the PPF represents alternate combinations of civilian goods & military goods this economy is unable to produce with its currently available resources & technology. In order to produce combinations outside the PPC, this economy must acquire more resources. As economists, we describe an economy that is on its PPF as being efficient because it is producing the maximum quantity...