Question

1) Explain the three functions that an economic system must perform and how a market economy

performs them.

2) What are the reasons that the PPF(Production Possibilities Frontier) is shaped the way it is?

3) What are the differences between comparative advantage and absolute advantage?

Answer 1

1. The three main functions that an economic system must perform are- Production, allocation and distribution

Production of goods that the society wants for consumption should be produced. These goods should then be allocated to different people for further development of the product. When the product is fully made, it should be distributed for its final consumption to wholesalers or shopkeeper who then sell it to the ultimate consumers. Once these products are distributed they will also have to be regenerated for future use. So the process of regeneration begins from here.

2. the shape of the production possibility curve that is concave to the origin is because of the increasing opportunity cost. Opportunity cost is the amount of a commodity that a nation has to sacrifice in order to produce an extra unit of the other good. There are increasing opportunity cost because resources are not equally efficient in the production of the two goods we take. Therefore we transfer more and more resources from the production of one good to the other and sacrifice more of one of the goods.

3. Absolute advantage is when a nation can produce more good at a faster rate than the other nation. Comparative advantage is based on the opportunity cost that a nation losses by choosing to produce one good than the other. If the opportunity cost to produce a good is lower in a nation, then it has a comparative advantage.