Question

1. Draw a Production Possibilities Curve showing increasing opportunity costs.
   1. Label the axes Consumer Goods and Capital Goods
   2. Draw a point on your graph to show an efficient production level (label this point E)
   3. Draw a point on your graph to show an inefficient production level (label this point I)
   4. Draw a point on your graph to show where you think the US economy is currently operating.
   5. Show economic growth on your graph and explain how economic growth occurs.

Answer 1

Ans) PPC shows the possible and feasible combination of goods that can be produced by an economy. It is made assuming that ÷

• Resources are limited.
• One good must be given up to produce another.
• Economy produces only two goods.
• Technology is constant.

A PPC which is bowed outwards, show the increasing opportunity cost. A straight line PPC shows constant opportunity cost.

Any point on the PPC show an efficient point (E) as it shows that all the resources are fully employed, any point inside the PPC shows inefficient production (I) as it shows that resources are not fully employed, any point outside the PPC (K) shows unattainable combination due to limited resources.

US economy is currently operating at point F, as it produces more of capital goods than consumer goods.

Economic growth is the increase in output from previous period. Now economy can grow by two ways,

One, by employing all its resources which were earlier not being fully utilized. This type of growth is represented by, a point which is inside the PPC, coming outside on the PPC.

Second, when a country's resources increase or there is increase in technology, its output increases i.e there is economic growth. This type of growth is represented by an outward shift of PPC. (In general this graph is used to represent economic growth).