Relevant Review:

   Introduction

Opportunity Cost

Production Possibilities

   Damaging hurricanes and strikes by airline pilots may not seem to have much in common, but the effect of both on the economy can be illustrated using Production Possibilities Frontiers or Curves (PPF). Since both a major strike and a major hurricane have been in the news recently we will illustrate the effects of each on an economy's PPF.

   To the right is a typical PPF for, say, the US. The blue curved line represents maximum combinations of Goods and Services that can be produced if all available inputs are used efficiently. In other words, if the economy is operating at near full employment and near full capacity it will produce a combination of Goods and Services that lies somewhere on the blue PPF. The yellow shaded area represents all possible combinations of Goods and Services when not all inputs are in use, so the blue PPF + yellow shaded area represent all possible output combinations for this economy.

   Recently the US economy has probably been producing somewhere near the frontier. Unemployment has been relatively low recently and there isn't an unusual amount of unused capacity in most US industries. How might a strike by Northwest Airline pilots affect US production of goods and services? The answer lies in realizing that striking workers aren't incapable of working, they have made a decision not to. (We're expressing no opinion on the strike itself.) Like a recession, in the short run this doesn't affect the possible output, but it does reduce actual output.

   The graph to the left shows the same PPF as before. Prior to the strike the economy might be almost on the frontier at a point like that labeled Capacity. As a result of the strike some productive resources go unused so the output of goods and services lies underneath the frontier at a point like that labeled Strike. No productive capability is lost, but output is reduced due to the idled resources.

   A hurricane, or other natural disaster is somewhat different in that damage can actually destroy productive inputs and thus reduce total possible output of goods and services. Fortunately hurricane Bonnie didn't cause as much damage as feared but a severe hurricane or earthquake or asteroid strike or other natural disaster can destroy a great deal of productive capacity (and/or supply plots for movies).

   The graph to the right shows how we illustrate the loss of productive resources. As resources and inputs are destroyed, the total output possible is reduced. Combinations of goods and serviced previously feasible no longer are. Since total possible output has fallen, even when all resources are fully utilized, the new, Post-disaster PPF must lie below the old Pre-disaster PPF.

   If all goes well, the pilot's strike will be resolved quickly and no part of the US will suffer serious damage from any sort of disaster, natural or otherwise.