Production possibility curve, Macroeconomics

PRODUCTION POSSIBILITY CURVE

As we have seen, the essence of economic analysis is the problem of scarcity and choice. We know that limited productive resources compel individuals, economic units and economies to choose certain ends. This can be explained by a simple diagrammatic presentation of the problem of choice.

Let us start with an economy with a given set of resources such as land, technical know-how, industries, tools and labor. A production possibility curve indicates the various combinations of two classes of goods that an economy can produce when its resources are fully employed. Though no economy in the world produces only two classes of goods, this brings forth the significance of what an economic choice implies. We can divide an economy's output into output for domestic consumption and output for exports, output of goods and output of services, output by the public sector and output by the private business sector, output of consumption goods and output of capital goods, output of labor-intensive goods and output of capital intensive goods and so on. However, for the purpose of illustration, we shall simply classify the output into two classes of goods as goods X and goods Y. Figure A1.1 shows a typical production possibility curve - also known as production frontier or transformation function.

Production Possibilities

Possible situation

Good X

Good Y

1

0

20

2

1

18

3

2

15

4

3

11

5

4

  6

6

5

  0

 

This curve shows the possibilities open for increasing the output of one class of goods by reducing the output of another. In the diagram, all the productive resources are assumed to be limited so that if they are all devoted to the production of X an amount Xmax could be produced. If they are all devoted to Y an amount of Ymax could be produced. Alternatively, by 'mixing' the allocation of resources to X and Y we can have various combinations of these two goods. Points A, B, C, D, E, F are points of full employment whereas at point G there are unemployed resources. The production possibility curve is drawn concave to the origin because, although resources have alternative uses, they are not equally efficient in all uses. In fact as more and more of one class of goods is produced, resources which are less and less suited to the production of that class of goods will be used. As a result, any given input resources will lead to a smaller and smaller rise in total output. This is indicated in the changing production possibilities along the curve

Production Possibility Curve

 

1190_Production Possibility Curve.jpg

Posted Date: 9/11/2012 3:29:07 AM | Location : United States







Related Discussions:- Production possibility curve, Assignment Help, Ask Question on Production possibility curve, Get Answer, Expert's Help, Production possibility curve Discussions

Write discussion on Production possibility curve
Your posts are moderated
Related Questions
Definition of Money We should define what we mean by money. Money has a long as well as interesting history and an understanding of how we came to use money is useful for any

Q. Money market with inflation and constant money supply growth? If π M = π and π e = π, both IS- and LM-curve will be fixed.  Figure: The money market with inflatio

Suppose we're modeling an economy using the Solow model. It begins in steady state. By what proportion does y? (the post-change steady-state per capita GDP) change in response to t

ECONOMIC ANALYSIS AND TYPICAL MANAGERIAL DECISIONS Despite the differences between microeconomic analysis and macroeconomic analysis, there is considerable overlapping and inte

SUppose nominal GDP increases from 5.8 trillion to 6 trillion. The GDP deflator rose over that same year by 3.9 percent. By what percent does the real output increase?

why is international trade important for south Africa

Normal 0 false false false EN-IN X-NONE X-NONE MicrosoftInternetExplorer4

What are the difference between explicit cost and implicit cost? Both are concerns to Opportunity Cost and Decisions: An explicit cost is a cost which involves essentially

The number of gallons of paint that Home Depot sells in a given day is normally distributed with a mean of 150 gallons and a standard deviation of 35 gallons (I realize that the di

REASONS TO NATIONALISE SARB