An Earthquake Destroys Factories

An Earthquake Destroys Factories, step by step

1. 1

   Start on the frontier

   The economy starts on its frontier, producing the largest combination of Good X and Good Y its resources and technology allow. Points inside the curve would mean resources sitting idle or being used badly, and points outside cannot be reached at all.

2. 2

   The disaster hits

   A major earthquake levels factories and machinery and tears up roads, ports and power lines. Physical capital is a resource, so the economy now has strictly less to work with than it did the day before. Its technology, the knowledge of how to produce, is unchanged.

3. 3

   The frontier shifts inward

   With fewer usable resources, the maximum output of both goods falls and the whole frontier shifts inward. Combinations the country produced comfortably last week are now unattainable, and the most the economy can make of either good is now less than before.

4. 4

   Two cautions

   First, the curve moved because resources were destroyed, not because spending fell. A drop in what people want to buy changes which point on the curve gets chosen, never where the curve sits. Second, this is not permanent: a country that rebuilds its capital stock, or adopts better technology, pushes the frontier back outward later.

Where it ends up

Destroying capital removes resources, so the frontier shifts inward and combinations the economy could once produce become unattainable.

Now draw it yourself

Same graph, graded on whether you move the right curve and leave the rest alone.

• Automation Lifts Both Industries →
• Flood Wipes Out Machinery →
• A Decade of Building Capital →

More Production Possibilities walkthroughs

• A Technology Breakthrough →
• A Decade of Building Capital →
• The Labor Force Expands →