In the last blog, we covered few concepts including opportunity cost, possible productive curve, and factors of production. While in this blog, we will begin with discussing the relation between the factors of production and production possibility curve. Just a reminder: factors of production contains land, capital, enterprises, and labor.

Any change in these factors will cause an outward shift for the production possibility curve, which showed by this graph.   

The reason for this outward shift is that the increase in labor, for example, will help the manufactory produce more, due to more people are engage in the production process. as same as the increase in capital, more machine are used for production, which will definitely increase the output for both goods.

As we are considering the shifting reasons for production possibility curve, it is necessary to point out  these three different situation:

For point A, which is defined as inefficient, occurs while the manufacture disabled to allocate all the factors of production in the most efficient way, problems like slack staff, or ineffective communication may exist. For point B, which is defined as efficient, occurs while the manufacture allocate all the factors of production in the most efficient way, thus the manufacture will produce the amount of good A and good B in the maximum combination. For point C, which is defined as impossible, is exactly what we discussed above. Improvement in the factors of production will help this “impossible” to “possible”

Economists invented a lot of concepts to understand the word “efficiency” in an economic way.

For the first one: economic efficiency

economic efficiency is about making optimal use of scarce resources to satisfy needs and wants. it means optimum allocation of resources, where the marginal social benefit is equal to marginal social cost (the concept of Margin will be covered in later blogs). This means that in order to satisfy economic efficiency, people need to satisfy both allocative efficiency and productive efficiency. Allocative efficiency happened when average revenue( total revenue divided by total output). Productive efficiency is happened while the output is produced at long run minimum average cost( total cost divided by total output), which is also where average total cost equal to marginal cost.

Technical efficiency is occur when there is no possible to increases output without increasing input. Every lowest point on the average total cost curve represent the technical efficiency.

Static efficiency, which represent the allocative efficiency and productive efficiency in the short run( a short period), or at a given point in time.

Dynamic efficiency, which represents the productive efficiency of a firm in long run( a long period of time) or over time due to engaging in technology advance.

Here is another very interesting efficiency named Paretto efficiency. This means that it is impossible to make one party better off without making someone worse off. the resources are distributed in the most efficient way, and satisfy both allocative efficiency and productive efficiency.

What dose it related with the “game theory”? We will find out in the next blog.

Welcome to my first passion blog! This will be my place for popularizing some economics knowledge.

“What is the basic idea for economic?” This is the question that asked by my high school economic teacher in the first class. After three years long economics study, I find that this basic idea is actually the reason for the existence of this subject.

“Scarcity”, said by my high school teacher, “economics is the subject that exploring scarcity”.

In another word, scarcity means that “unlimited wants chasing the limited resources”. if nothing scarce in our world, then economics problems will also vanished.

Scarcity is also the reason for the existence of the terminology “opportunity cost”, which is another major concept in economics. The definition for opportunity cost is the forgone benefit that would have been derived by an option not chosen. This shows that people need to make choice while that are making decisions, they need to give up something in order to get something else, If everything in this world is infinite, then it is unnecessary for people to make choice.

The terminology —opportunity cost— will lead to the concept production possibility curve, which is showed by the following pictures. The production possibility curve is a curve that illustrates the variations in the amounts that can be produced of two products if both depend upon the same finite resource for their manufacture. From this picture, for instance, The firm can only produce seven units of good A, or eight units of good B at a given period with given resources. However, the entrepreneur can make choice, if he wants good A and good B in the same time. After the evaluation of this firm’s production capability, the entrepreneur find that he can produce two units of good A and five units of good B, or four units of good A and two units of good B. That is to say, if this entrepreneur wants two unit of good A and five unit of good B, he is confront with the situation that he need to give up seven units minus two units of good A, in order to get five units of good B. In this circumstances, the five units of good A that been forgone is the opportunity cost for this production process.

When discussing about production process, there will be a significant concept called “factor of production” which is well-known as FOP. The definition for this concept is that inputs needed for the creation of a good or service, including land, labor, entrepreneurship, and capital.

Firstly, As the name implies, land can be defined as the nature resources. For instance, the place used for cultivation, and the oil, mineral are all counted as land.

secondly, labor, this can be defined as the human resources. Examples are including the workers in manufactories, or waiters who serves guests.

Thirdly, capital, this can be defined as the machine used for production, like the tractor purchased for farming.

Fourthly, entrepreneurship, which is act as an allocator for these three factors upon, and also act as a risk taker.

What is the relation between these four factor and production possibility curve? We will find it out in the next blog.