Question

On March 27, 2020, President Trump invoked the Defense Production Act, ordering GE to manufacture ventilators for the fight of COVID 19 pushing the private industry into producing health-care emergency supplies. Aside from GE, which received federal orders to adapt its production to the needs of the moment, many other businesses, on their own, have decided to shift/adjust their production decisions under new circumstances. How do you interpret this in economic terms, using the basic production possibility curve model to analyze this situation?

Answer 1

Production possibility curve shows the possible combination of output that a nation can produce given its fixed and limited resources. According to the given situation, the GE and the many other businesses are shifting their resources from the production of the good that they originally made towards the manufacturing of ventilators as the need of the hour.

In the diagram the situation is explained. The Y axis represents all other goods that are being produced in the economy while on X axis is the number of ventilators produced in the economy. The Initial PPC is PP' when a few ventilators are being produced and all other goods are produced to the fullest. Due to the current emergency situation, resources have been shifted and the new PPC is VV'. In the new PPC ventilators are made to the fullest potential of the economy's limited resources while the production of all other goods has decreased substantially. The slope of the PPC is the oppurtunity cost. In our e.g to produce 5 more units of ventilaors, 5 units of other goods are being sacrificed. (for simplicity I have not used any specific unit). Also notice that initial output combination was 8 units other goods and 3 ventilators and after the shift of the PPC the combination is 3 units of other goods and 8 units of ventilators. hence here I have assumed no loss in efficiency due to shifting ot resources.