TOPIC III: Specific Factors and Income Distribution

CLASS WORK

An economy can produce good 1 (using labor and capital) and good 2 (using labor and
land). The total supply of labor is 100 units. Given the supply of capital, the outputs of the two
goods depends on labor input as follows:

Labor Input to Output of Good 1 Labor Input to Output of Good 2

Good 1 Good 2

0 0 0 0

10 25.1 10 39.8

20 38.1 20 52.5

30 48.6 30 61.8

40 57.7 40 69.3

50 66.0 50 75.8

60 73.6 60 81.5

70 80.7 70 86.7

80 87.4 80 91.4

90 93.9 90 95.9

100 100 100 100

a. Graph the production functions for good 1 and good 2.

b. Graph the production possibility frontier. Describe and explain you graph.
 A.
Production Function of Good 1
120

100

80
OUTPUT

60

40

20

0
0 20 40 60 80 100 120
LABOR INPUT
Production Function of Good 2
120

100

80
OUTPUT

60

40

20

0
0 20 40 60 80 100 120
LABOR INPUT
 B.
Production Possibilty Frontier
120

100

80
GOOD 2

60

40

20

0
0 20 40 60 80 100 120
GOOD 1

Good 1 is
shown on the vertical axis and Good 2 is shown on the horizontal axis. If the economy
were to allocate all of its resources to Good 1, it could produce at point F. But it would
not have any resources to produce Good 2. If it were to allocate all of its resources to
Good 2, it could produce at point A.
If the economy wants to produce more of Good 1, they must produce fewer of
Good 2, based on limited resource availability. Likewise, if they want to produce more
Good 2, they must produce less of the Good 1. The economy must assess the opportunity
cost of producing more of one or the other. If the economy wants to increase the
production of Good 1 from 75.8 to 81.5 units, this requires sacrificing the production of
 8.5 units of clothes. And if the economy wants to increase the production of Good 2 from
57.7 to 66.0 units, they must sacrifice the production of 6 units of Good 1.
Alternatively, the economy could choose to produce any combination of Good 1
and Good 2 shown on the production possibilities frontier. Economy can choose any
combination of the two goods on or inside the PPF. But it does not have enough
resources to produce outside the PPF.

PREPARED BY: HANNAH MAE D. SARZA (BSBA MF 3)