Economics and Production Possibilities Curve

Topics: Economics, Supply and demand, Diamond Pages: 4 (1143 words) Published: November 24, 2012
Soha Oean

Problem #1: Using either a graph or table (Refer to page 22 for help with graphs and tables) use two goods to construct a production possibilities curve. Clearly explain what a variety of different points on the curve mean. What would make the curve expand or contract? Why is efficiency lost at the extremes, as when substantially more of one good and very little of another is produced?


To construct this curve we need four assumptions:-
1-The economy produces just two goods example Cars and Tractors. 2-There is finite amount of resources available example land, labor and capital. 3-The resources are used efficiently.
4-The methods of production that are used does not change or technology does not change.

The production possibilities curve will be helpful in understanding the need to make choices and the role of opportunity cost when resources are scarce. In our example Tractors and Cars as the economy two goods, if society decided on producing only Tractors the production will hit its maximum level. In the other hand the cars production will be zero.

One Tractor =2 Car, the opportunity cost of producing one Tractor is 2 cars. That takes more time and resources to produce one Tractor than car. By looking at the table A or graph A, we have an inverse relationship because the two variables change in opposite direction, 1 Tractor = 2 Cars. When car number decrease, Tractor no increase, and when car number increase, tractors number decreases. “The six data points in the table A are plotted in the graph. Observe that an inverse relationship always graphs as a down sloping line”. (McConnell,2012 ).

Curve will expand when 2 goods are produced efficiently example if I chose to produce one Tractor and 2 cars then we are producing less than our capacity even though we have the resource to produce more. Basically what makes the curve expand is when there are grows in economy its production possibilities curve will expand because...
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