4 factors of production economics definition

Inefficient production implies that the economy could be producing more goods without using any additional labor, capital, or natural resources.Figure 2.8 Efficient Versus Inefficient Production If it is using the same quantities of factors of production but is operating inside its production possibilities curve, it is engaging in inefficient production. When an economy is operating on its production possibilities curve, we say that it is engaging in efficient production. It would be producing more snowboards and more pairs of skis – and using the same quantities of factors of production it was using at B′. Had the firm based its production choices on comparative advantage, it would have switched Plant 3 to snowboards and then Plant 2, so it would have operated at point C.

Had the firm based its production choices on comparative advantage, it would have switched Plant 3 to snowboards and then Plant 2, so it could have operated at a point such as C. Suppose that Alpine Sports is producing 100 snowboards and 150 pairs of skis at point B′. Instead of the bowed-out production possibilities curve ABCD, we get a bowed-in curve, AB′C′D. This time, however, imagine that Alpine Sports switches plants from skis to snowboards in numerical order: Plant 1 first, Plant 2 second, and then Plant 3. Figure 2.8 'Efficient Versus Inefficient Production' illustrates the result. The firm then starts producing snowboards. With all three of its plants producing skis, it can produce 350 pairs of skis per month (and no snowboards). Suppose that, as before, Alpine Sports has been producing only skis.

If it fails to do that, it will operate inside the curve. An economy achieves a point on its production possibilities curve only if it allocates its factors of production on the basis of comparative advantage. Could it still operate inside its production possibilities curve? Could an economy that is using all its factors of production still produce less than it could? The answer is 'Yes,' and the key lies in comparative advantage. Now suppose Alpine Sports is fully employing its factors of production.

4 factors of production economics definition