Essay Sample on Short-Run and Long-Run Costs

Countries depend on each other for the production of some of the products they need, because their counterparts are more efficient and effective in that line of production. The concept leaves space for international trade. To make such decisions, economists develop production possibility frontier (PPF) curves. The curve helps them decide on the path of production to take and which one to abandon. The goal is to optimize production in quality and quantity (Jiang & Fan, 2020). In the case scenario, Brazil would be better off producing clothing and buying cans of soda from the United States. On the other hand, the US would fare better, producing cans of soda and purchasing clothing from Brazil.

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United States Production Possibility Frontier (PPF)

ARABIC 1: United States Production of Clothing and Soda

Clothing Cans of Soda

65,000 0

32,500 125,000

0 250,000

Brazil’s Production Possibility Frontier (PPF)

ARABIC 2: Brazil Production of Clothing and Soda

Clothing Cans of Soda

100,000 0

50,000 25,000

0 50,000

Any country needs to decide on the product they shall produce and one to buy from other countries. To make a proper decision, some principal factors must be weighed. The maximum efficiency is within the curve limits. Anything outside the curve is a representation of inefficient operation or an impossible level of production. In an optimum scenario, Brazil would have to produce 80,000 units of clothing and 10,000 units of cans of soda. To produce 50,000 cans of soda, they would give up all production of clothing. Optimization is shaped by elements of marginal cost.

Marginal cost refers to the additional cost invoked for the production of an extra unit of service or product. Further, the opportunity cost must be considered. It is defined as “the return of a foregone option less than the return on one’s chosen option” (Jiang & Fan, 2020). The relationship between external buying and reducing production on any product must be a win-win situation for the involved parties.

IF THE United States brings on board all resources and products, the production of clothing and soda cannot be done at optimum capacity for both. Both industries have to be established, funded, and possess operating systems. Still, they cannot work in the full dispensation of their mandate.

On the one hand, for 10,000 cans of soda that Brazil makes, they can produce 80,000 units of clothing. On the other hand, for every 10,000 units of clothing that the US provides, they can make 225,000 cans of soda. In more straightforward math, the cost of one soda can unit in Brazil would cover the cost of 8 units of clothing. In the United States, the cost of one unit of clothing can be used to make 22.5 units of soda cans. Therefore, Brazil would instead be producing clothing and buying soda cans. The United States would be better off producing soda cans and purchase clothing. The two countries can get into a trade deal to cover each other’s deficits in their production lines.

Both lines of production require a labor-intensive process. Some countries may not be in a position to distribute their labor force into different industries to meet national needs. Therefore, importation of such products that can be produced cheaply and more efficiently in other countries helps seal the labor gaps. The approach could help retain the market balance of goods and services. Labor that could be used partially in different industries is redirected to optimize the ones where the country is more efficient. It ensures the production of enough for local use and export to other countries.

The marginal rate of transformation in either country is quite high. Brazil has to forgo eight units of clothing to make a can of soda, and the United States has to forego 22.5 cans of soda to produce one group of clothing. Such can be avoided through international trade. Between the United States and Brazil, the latter is more labor-abundant, and the former is more capital abundant. Therefore, as much as the United States may have the capital ability to make a huge production of either, it may not be well-endowed with human resources. On the other hand, Brazil may have the labor capacity to produce both clothing and soda cans, but their capital abundance may not allow it to happen.

Interdependence is enforced by many factors, among them capital and labor. People seek what they cannot afford from foreign markets, and that creates the required balance. Developing countries like Brazil have great potential to uplift their people from poverty, especially considering their labor capacity. There are different ways to help such countries reduce poverty. Loans and grants from international partners for economic developments can help create employment and reduce the number of people living in poverty (Hoy & Sumner, 2016). Foreign direct investments (FDI) could also help establish industries that employ people, give them a livelihood, and increase the country’s gross domestic product (Hoy & Sumner, 2016). For instance, an investor from the United States could set up a cloth factory in Brazil, take advantage of the labor abundance of the country, and sell the products back to the United States. This would create employment in Brazil and improve the national gross domestic product.

The production–possibility frontier of any country is a great economic decision-making tool. The tough decisions of what to decrease and what to increase in production are aligned to projections of PPF (McCoy, 2013). If the numbers can be appropriately projected, incorporating the elements of marginal cost and opportunity cost, decisions are more comfortable to come along. The two graphs made a straight line, meaning that the opportunity cost is spread across each unit of production constantly. However, some increase inversely and produce curved PPF graphs. In such instances, more mechanisms are adopted to establish optimum production.

References

Hoy, C., & Sumner, A. (2016). Global Poverty and Inequality: Is There New Capacity for Redistribution in Developing Countries?. Journal Of Globalization And Development, 7(1). https://doi.org/10.1515/jgd-2016-0021

Jiang, W., & Fan, J. (2020). Study on Production Possibility Frontier Under Different Production Function Assumptions. Communications In Computer And Information Science, 121-131. https://doi.org/10.1007/978-981-15-2810-1_13

McCoy, N. (2013). Behavioral externalities in natural resource production possibility frontiers: integrating biology and economics to model human-wildlife interactions. Journal Of Environmental Management, 69(1), 105-113. https://doi.org/10.1016/s0301-4797(03)00122-1