Q: Draw a production possibility curve and explain how it illustrates the trade off that must be made when

an economy is operating at full employment how can unemployment and economic growth be shown on this graph.

Production Possibility curves
The production possibility curves is a hypothetical representation of the amount of two different goods that can be obtained by shifting resources from the production of one, to the production of the other. The curve is used to describe a society’s choice between two different goods. Figure 1, shows the two goods as consumption and investment. Investment goods are goods that are involved in the production of further consumption goods. They include physical capital such as machines, buildings, roads etc. and human investments such as education and training. The sums of all investments make up the capital stock of a society. To show the point where all resources were used to produce consumption goods, one should move straight up the vertical axes to the curve. To show the point were all resources were used to produce investment goods, one should move straight on the horizontal axes to the curve. Both points are extreme and unrealistic. Both points A and B represented more realistic combinations, with point A showing more consumption and less investment, while point B shows more investment and less consumption.
Figure 1 The production possibility curve of figure 1., shows the trade off in production between investments and consumption goods. Any two categories of different goods could be chosen. What they are is arbitrary. The curve is used to show during a specific period, what could be produced of the combination of the two goods, if all resources are fully employed, while technology and institutions do not change. Given those conditions, societies output potential is realized anywhere on the curve (which is called the production possibility curve’s frontier). Unemployed resources (labor, capital, physical resources) of any kind would result in an inefficient production level, and would be shown as a point to the left, or inside the curve. By definition all point to the right or outside of the production possibility curve (frontier) are impossible, given the limits of resources and technology.
Trade, Comparative Advantage and Absolute Advantage Specialization and Comparative Advantage An economy can focus on producing all of the goods and services it needs to function, but this may lead to an inefficient allocation of resources and hinder future growth. By using specialization, a country can concentrate on the production of one thing that it can do best, rather than dividing up its resources. For example, let's look at a hypothetical world that has only two countries (Country A and Country B) and two products (cars and cotton). Each country can make cars and/or cotton. Now suppose that Country A has very little fertile land and an

abundance of steel for car production. Country B, on the other hand, has an abundance of fertile land but very little steel. If Country A were to try to produce both cars and cotton, it would need to divide up its resources. Because it requires a lot of effort to produce cotton by irrigating the land, Country A would have to sacrifice producing cars. The opportunity cost of producing both cars and cotton is high for Country A, which will have to give up a lot of capital in order to produce both. Similarly, for Country B, the opportunity cost of producing both products is high because the effort required to produce cars is greater than that of producing cotton. Each country can produce one of the products more efficiently (at a lower cost) than the other. Country A, which has an abundance of steel, would need to give up more cars than Country B would to produce the same amount of cotton. Country B would need to give up more cotton than Country A to produce the same amount of cars. Therefore, County A has a comparative advantage over Country B in the production of cars, and Country B has a comparative advantage over Country A in the production of cotton. Now let's say that both countries (A and B) specialize in producing the goods with which they have a comparative advantage. If they trade the goods that they produce for other goods in which they don't have a comparative advantage, both countries will be able to enjoy both products at a lower opportunity cost. Furthermore, each country will be exchanging the best product it can make for another good or service that is the best that the other country can produce. Specialization and trade also works when several different countries are involved. For example, if Country C specializes in the production of corn, it can trade its corn for cars from Country A and cotton from Country B. Determining how countries exchange goods produced by a comparative advantage ("the best for the best") is the backbone of international trade theory. This method of exchange is considered an optimal allocation of resources, whereby economies, in theory, will no longer be lacking anything that they need. Like opportunity cost, specialization and comparative advantage also apply to the way in which individuals interact within an economy

UNEMPLOYMENT, POSSIBILITIES:

PRODUCTION

Unemployment is the condition that exists when some available resources are NOT engaged in the production of goods and services. In other words, some resources that could be used for production are not being used. This is indicated in production possibilities analysis by producing a combination of goods that places the economy inside the production possibilities curve.

Production

possibilities, which analyzes the alternative combinations of two goods that an economy can produce with given resources and technology, indicates unemployment when production is inside the production possibilities curve.
Unemployment means resources that could be used for production are not being used. And when some resources are not being used for production, the economy does not reach the production possibilities curve--the curve that corresponds to full employment. In particular, unemployment results from any point INSIDE the production possibilities curve. To illustrate this, use the mouse arrow to point out unemployment as all points, including L, that lie INSIDE this curve for the production of crab puffs and storage sheds. However, you might also note that points D and J on the boundary of the production possibilities curve achieve full employment. In addition, note that point M is not attainable with existing resources and technology.

Q: Draw a production possibility curve and explain how it illustrates the trade off that must be made when an economy is operating at full employment how can unemployment and economic growth be shown on this graph.
PRODUCTION POSSIBILITIES:
An analysis of the alternative combinations of two (or more) goods that an economy can produce with existing resources and technology in a given time period. Production possibilities analysis provides insight into the fundamentals of economic thinking, including the introduction of key economic concepts. This analysis usually centers on either a convex production possibilities curve (or frontier) that reflects alternative production combinations of two goods. PRODUCTION POSSIBILITIES CURVE: A curve that illustrates the production possibilities for the economy. A production possibilities curve (or PPC), like the one presented here, represents the boundary or frontier of the Production Possibilities Curve economy's production capabilities. That's why it's also frequently termed a production possibilities frontier (or PPF). As a frontier, it is the maximum production possible given existing (fixed) resources and technology. Producing on the curve means resources are fully employed, while producing inside the curve means resources are unemployed. The law of increasing opportunity cost is what gives the curve its distinctive convex shape The analysis of production possibilities is one of the most fundamental, and usually one of the first, analyses undertaken in the study of economics. A representative production possibilities curve is presented here. For this particular curve, the two goods produced by society are "Crab Puffs" and "Storage Sheds."

What it Does
Production possibilities analysis is undertaken early in the study of economics for three reasons: (1) it sets the stage for answering the basic "What?" question of allocation, (2) it can be used to illustrate several basic economic concepts, and (3) it introduces the fundamental techniques of graphical analysis that are essential to other economic analyses.

1. Say What?: Production possibilities analysis sets the stage for how society goes about answering the "What?" question of allocation. Scarcity dictates that an
economy must choose among millions of different goods. What goods does society ultimately decide to produce? An answer to this question depends in part on what goods society can produce, which is production possibilities analysis. 2. Terms, Terms, More Terms: A number of important terms pop up throughout the study of economics, including unemployment, opportunity cost, full employment, investment, and economic growth. Production possibilities provides insight into, and a graphical representation of, these terms. 3. Making Graphs: A useful side benefit of production possibilities is hands-on work with the graphical techniques that are essential to the study of economics. Production possibilities is a basic analysis that illustrates how graphical models are constructed, interpreted, and used to analyze real world events. FULL EMPLOYMENT: In principle, this is when all of our economy's resources are being used to produce output. This is one of the five economic goals, specifically one of the three macro goals (the other two are economic growth and stability). In practice, our economy is considered to be at full employment when the unemployment rate is around 5 to 5 1/2 percent and the capacity utilization rate is about 85 percent. This unemployment rate includes structural and frictional unemployment. UNEMPLOYMENT: The general condition in which resources are willing and able to produce goods and services but are not engaged in productive activities. While unemployment is most commonly thought of in terms of labor, any of the other factors of production (capital, land, and entrepreneurship) can be unemployed as well. The analysis of unemployment, especially labor unemployment, goes hand-in-hand with the study of macroeconomics that emerged from the Great Depression of the 1930s.

Four Assumptions
The four key assumptions of production possibilities analysis are: (1) resources are used to produce one or both of only two goods, (2) the quantities of the resources do not change, (3) technology and production techniques do not change, and (4) resources are used in a technically efficient way.

1. Two Goods: Resources are used to produce one or both of only two goods. This is a
simplifying assumption that makes it easy to display production alternatives using graphs. More than two goods could be analyzed using advanced mathematics. 2. Fixed Resources: The quantities of labor, capital, land, and entrepreneurship resources do not change. This is a reasonable assumption, but it can be relaxed to analyze the consequences of changes in these resources.

3. Fixed Technology: The information and knowledge that society has about the
production of goods and services is fixed. This is another reasonable assumption that can be relaxed to analyze the effects of technology changes. 4. Technical Efficiency: Resources are used in a technically efficient way. That is, the maximum possible production is obtained from the resource inputs.

Satisfaction Not Included
Production possibilities analysis only indicates what can be produced. It provides no information about the desirability of, or satisfaction derived from, the goods that are produced. The economy might be able to produce 1000 Wacky Willy Stuffed Amigos. But does anyone want Wacky Willy Stuffed Amigos? Who knows? This information is not to be found anywhere in the production possibilities analysis. Moreover, because there is no information about satisfaction there is no insight into economic efficiency. Although production possibilities relies on the assumption of technical efficiency, the analysis cannot be used to determine if the combination of goods produced achieves the greatest possible level of consumer satisfaction, or something less.

Concepts for Further Review
The most important economic concepts illustrated using production possibilities analysis are: opportunity cost, full employment, unemployment, economic growth, and investment. • • • • • Opportunity Cost: This is indicated by the negative slope of the production possibilities curve (or frontier). As more of one good is produced, less of the other goods is produced. This production reduction is opportunity cost. Full Employment: This is indicated by producing on the production possibilities curve. The curve indicates the maximum production obtained with existing technology, given that all available resources are engaged in production. Unemployment: This is indicated by producing inside the production possibilities curve. If some available resources are not engaged in production, then the economy is not achieving maximum production. Economic Growth: This is indicated by an outward shift of the production possibilities curve, which is achieved relaxing the assumptions of fixed resources and technology or by increasing the quantity or quality of resources. Investment: This is indicated by a tradeoff between the production of consumption goods and capital goods. Investment results if society moves along the production possibilities curve, producing more capital goods and fewer consumption goods.

Q: Assume the scientific invention has doubled the productivity of society resources and butter production without altering the productivity of gun manufacture, draw PPF to show the difference before and after.

do i nonly need to double the production of butter to : 0,1,4,6,8,10 and keep the guns the same or i need to reduce the amount of guns too? No you don't need to change the amount of guns because it says without altering the productivity of gun manufacture. So gun supply is on the same line while butter supply has shifted
Younger

Sign up to vote on this title
UsefulNot useful