Question

Draw a production possibilities frontier that shows the trade-off between the production of cotton and the production of soybeans. a. Show the effect that a prolonged drought would have on the initial production possibilities frontier. b. Suppose that genetic modification makes soybeans resistant to insects, allowing yields to double. Show the effect of this technological change on the initial production possibilities frontier.

Short answer

An initial downward sloping PPF represents the trade-off between cotton and soybeans. A drought causes an inward shift of the PPF, decreasing the output of both cotton and soybeans. A technological change that improves soybean yields causes the PPF to shift outwards on the x-axis, indicating a higher production capability for soybeans, while the production of cotton stays the same.

Step-by-step solution

Drawing the Initial PPF

Start by drawing a conventional downward sloping PPF curve with cotton on the y-axis and soybeans on the x-axis. The PPF illustrates the maximum feasible amount of both goods that can be produced given a set of resources.

Effect of Prolonged Drought

A prolonged drought will decrease the maximum feasible output of both goods. To represent its impact, draw a new PPF inside the initial curve. This inward shift signifies that the production capabilities of both goods are reduced due to limited resources.

Effect of Technological Change

A technological change such as genetic modification to make soybeans resistant to insects will increase the output of soybeans. To illustrate its effect, draw a new PPF from the initial curve outward, on the soybeans' side. This means the production of soybeans has increased, but not the production of cotton.

Key concepts

Economic Trade-offs

When evaluating the production possibilities frontier (PPF), we encounter the concept of economic trade-offs, which are essential in understanding how economies allocate resources. An economic trade-off involves a decision made to forgo one option in favor of another, considering the limited resources available. For example, a farmer who has a fixed amount of land must decide how to distribute this resource between growing cotton and soybeans. If the farmer uses more land for cotton, less land remains for soybean cultivation, and vice versa.

Understanding these trade-offs is crucial for managing resources effectively, as every decision has an impact on what an economy can produce. Choices must be made between different goods, and these choices bring forth the real cost of opportunity - represented by the foregone alternative.

Opportunity Cost

The core of opportunity cost lies in the value of the next best alternative given up when making a decision. This cost is depicted graphically in the PPF exercise through the slope of the curve. If a farmer decides to produce more cotton instead of soybeans, the opportunity cost is the amount of soybeans that won't be produced.

The steeper the PPF, the higher the opportunity cost of producing cotton as compared to soybeans, and this becomes a critical factor in deciding the optimal allocation of resources. By understanding opportunity costs, students, policymakers, and businesses can make informed decisions that reflect the real cost of their actions, enabling them to optimize their production strategies.

Technological Change in Economics

Technological advancements often lead to shifts in the PPF as productivity increases, which is termed as technological change in economics. For instance, in the given exercise, the genetic modification of soybeans that makes them resistant to insects would effectively double their yields.

This innovation would shift the PPF outward for soybeans, indicating increased efficiency and productivity for that crop. The curve does not shift for cotton because the technology only impacts soybean production. Through such technological changes, economies can grow without increasing the amount of resources, since the same resources can now yield more output due to improved technology. This concept underscores the potential for economic growth and sustainability through innovation.

Effects of Drought on Economy

Environmental factors, such as drought, have substantial impacts on an economy's production capabilities, demonstrated within the context of the PPF. A drought reduces the availability of water, a crucial resource for agriculture, leading to lower yields for both cotton and soybeans.

In the exercise, the effect of drought is shown as an inward shift of the PPF. This represents a decrease in the economy's ability to produce goods, compelling the economy to adapt by possibly reallocating resources, finding ways to conserve water, or seeking alternatives to maintain production levels. The effects of drought serve as a stark reminder of how external factors can impose severe economic constraints, necessitating resilience and adaptability in production methods and economic planning.