Intertemporal production possibilities
Intertemporal production possibilities is a term used in economics that is considered in connection with international factor movements and the foreign trade model. Furthermore, it is part of intertemporal production decisions and therefore largely classified in production theory , in which transformation curves play an essential role. Many economic decisions are intertemporal (in the meantime), which means that current choices in decision-making also influence choices in the future. This also applies to the selection of production options.
Intertemporal decisions
Intertemporal decisions are characterized by a kind of intermediate compromise. If you give up something today, you want to be compensated for the loss in the future. If, for example, a company removes an unprofitable product from its range in the present, it can transfer the capacities that have become free to other products in the future and thus achieve an overall increase in profit.
Production possibility curve
- see main article: Transformation curve
For clarification, the term production possibilities (curve) should be briefly explained. The prerequisite is that a company produces goods, that is, that it is able to convert or transform goods (input) into other goods (output). This can best be represented using a transformation curve. This curve is based on the assumption that the company produces two types of goods (outputs) and that the various combinations of goods are produced with a fixed amount of production factors.
For example, sheep farming, meat and wool can be produced using the production process in an agricultural company. This curve shows that if one wants to produce more of good 1, in this case meat, the production of good 2, here wool, will decrease in return. The curve is not linear, but rather concave , as composite production usually has advantages. A single company has the option of producing more goods 1 and 2 with the same resources than, in contrast, two companies that produce each good individually. The goods transformation curve for the sheep farming company shows a negative slope; this can be explained by the substitution effect when meat is replaced by wool. The limits of the production possibilities are also shown on the curve. Combinations of goods above the curve cannot be achieved with given technical resources, but those below are possible, but mean that the production possibilities are not used optimally. The curve itself therefore shows the production possibilities with optimal use of the production factors.
Alternative definitions
Intertemporal production decisions
“The production decisions of the companies often have intertemporal aspects - the production today influences the sales or the costs in the future. With today's production, the company gains experience that reduces its future costs. In this case, production today is partly an investment in future cost reductions. "
Intertemporal production opportunities and foreign trade
“Every economy has to weigh up current and future consumption. The more investments an economy makes today, the more it will be able to produce and consume in the future. In order to invest more, an economy must therefore free resources by consuming less. Current and future consumption must therefore be weighed against each other. "
Intertemporal Transformation Curve and Intertemporal Trade
As already mentioned above, the amount of intertemporal production possibilities can also be represented with the help of a transformation curve. Fig. 2 shows the relationship between future and current production of a good that is intended to serve consumption. It has the same course as the curve under point 2 (see above). Intertemporal transformation curves differ in shape from country to country. In some countries, for example, distortions in the direction of current production (consumption) or future production (consumption) can occur.
Assume that there are two countries, domestic and foreign, with the foreign being more oriented towards future consumption and the domestic being focused on current consumption. Furthermore, no international lending is possible. Then the relative price that the home country would have to pay for future consumption is higher than abroad. Provided that trade between the present and the future is permissible, "Home would have to export current consumption and import future consumption."
Example of intertemporal production possibilities
Production in the context of scarce resources is linked to intertemporal decisions. If an owner of a lignite mine extracts more coal today, there will be less lignite in the future that can be used for production (for consumer goods), it is assumed that there is no substitute for lignite. In Fig. 3 it can be seen that production will decrease significantly in the future (X2). The company must now weigh the costs and benefits today against the costs and benefits in the future. In doing so, the opportunity costs must also be considered, that is, what happens if the lignite is used up today and there is therefore nothing left for the future. If a sharp rise in the price of lignite is to be expected in the future, it makes more sense, in terms of revenue, to limit the current mining. If, however, a substitute good, such as solar energy, which can be produced more cheaply, is to be expected in the long term, current consumption should be encouraged, as this could mean a decline in demand for lignite in the future.
Individual evidence
- ↑ Robert S. Pindyck and Daniel L. Rubinfeld: Microeconomics . 4th edition, Oldenburg, Munich and Vienna 1998, p. 685
- ^ A b Paul R. Krugman and Maurice Obstfeld : International Economy, Theory and Politics of Foreign Trade . 7th edition, Pearson Studium, 2006, p. 214.
literature
- Robert S. Pindyck and Daniel L. Rubinfeld: Microeconomics . 6th edition, Pearson Studium, 2005, ISBN 3827371643
- Alfred Stobbe: Microeconomics . 4th edition, Springer textbook, Berlin and Heidelberg 1991
- David M. Kreps: Microeconomic Theory (translation by Ulrich K. Schlittko). Verlag Moderne Industrie, Landsberg / Lech 1994, ISBN 3478392802