Question

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The following table provides an economy’s ability to produce scoops of Lemon Gelato, LG or Coconut Gelato, CG.

Lemon Gelato Scoops, LG	0	160	250	330	400	460	510	550	575	590	600
Coconut Gelato Scoops, CG	1000	900	800	700	600	500	400	300	200	100	0

1. Explain WHY there is a “curve” or “boundary” associated with these values in the table? Why is there a MAXIMUM boundary or Frontier of Possible Production?
   
2. If we draw this curve or boundary APPROXIMATELY to scale, WHAT SHAPE – a straight line, a concave line, or a convex line - would describe the curve AND WHY would this the case?
   
3. Why is TECHNOLOGY, T important to an Economy-Wide Productive Potential?
   
4. How might an INCREASE in the Productive Potential of ONE GOOD ONLY lead to the ability of the economy to actually INCREASE the actual production of BOTH GOODS?

Answer 1

The curves or lines that are associated with these values in the table is known as a production possibility curve. The production possibility curve represents various combinations that can be produced using given resources and Technology . There is a maximum boundary for the Frontier and the possible production because the firm who is producing the goods possesses limited resources and Technology which can be either used to produce one good or the other one and if it chooses to produce one god it has to forego production of some units of the Other good .Usually a production possibility Frontier is concave and is bulging upwards from the origin. In the above case the PPF curve is concave to the origin because the opportunity cost is increasing with the increase in output of goods .

Technology is important for an economy-wide production potential because with the increase in technology more units of both goods can be produced using the same resources and inputs. Thus when the technology level is elevated then instead on shifting on another combination on the same PPF curve , the PPF curve itself shifts above its original level thereby increasing the actual production of both the goods .