Dimensional Model of the Macroeconomic Decisions, Essay Example

The production possibility curve is a two dimensional model of the macroeconomic decisions a country or any economically minded actors. It shows the relation between their ability to produce two separate goods. Any point on the curve is a possible level of production as are points inside the curve. However, points inside the curve represent a poor utilization of resources that needs to be avoided. In the example graph, the society can choose certain levels of production between education and healthcare. For example, when producing twelve units of education, they can produce thirteen units of healthcare. Yet to produce sixteen units of education, eleven is highest possible production of healthcare they are capable of. This shows the economic principle of trade-offs. Any increase in production for one good is only possible with a decrease in production from the other good.

The reason for this is simple. Economies face limited resources that limit the ultimate total of goods that can be produced. This means dedicating extra resources to one good causes leaving fewer resources to the production of other one. Since the total amount of goods produces is a function of amount of resources utilized in the production process, this means there is a direct trade off between each good.

The reason it is curved instead of a straight line because of diminishing marginal returns. At the locations where significant units of both goods are being produced the resources most suitable to each good are being used to their most productive functions. However, at more extreme ends, more resources need to be dedicated to the production, meaning less suitable resources are being used for each role. For example, in a PPC between two agricultural products, such as oranges and apples, land must be utilized for each type. In the United States, land in Florida will be used for growing oranges while growing apples will take place in Washington State. At the most extreme, Washington would be used for oranges or vice versa. The more extreme points on the graph feature less suitable resources for each good, which is why the curve is not a straight line. In the example here, people would be suited more for either healthcare or educational work. The more the production suits to one extreme, the more unsuitable the people at the margin would be used for.

The point of the PPC is just to help conceptualized the decision about the tradeoff on the production between each good. For example, a society has the choice between consumer goods or military goods and can produce more of one at the expense of the other. Since some resources are naturally more inclined for one other than the other, the graph features a curve. The PPC can also show more localized decisions such as how one person chooses between mental and physical production. There is a limited amount of time in the day so there are limited amounts of exercising or studying that someone can do.  The person will tire out after extended times of either, meaning dedicating entire days to either activity will be less productive than a more balanced approach.