Question

Define production possibility frontier stating clearly the assumptions underlying its
construction.

Briefly explain the following :

i) Giffen goods
ii) Necessity goods
iii) Inferior goods
iv) Substituted goods
v) Complementary goods
vi) Normal goods

Answer 1

Answer)

1. Production possibility frontier is a curve which shows what combination of 2 goods one can produce using same resources,so if you want to produce more of 1 good you have to give up some of other one,one cannot go beyond this curve as resources would not be available,so this curve shows the possibility of various combinations one can produce using same resources.Assumptions associated with this curve is that maximum of 2 goods can be produced.resources used for both goods are same ,there is no technological improvement and resources are used in same way.
2. Giffen good is a good which is in violation of law of demand and supply of economics,as its price rises ,people consume more of it,while as its price falls people buy less of it it is generally considered as a low income good,an example would be something of a staple good which is comparitively cheap to other such goods,now as this good 's price rise it becomes expensive but it is still cheaper than other goods in similar staple category,so people will replace other staple goods and start buying more of this giffen good and thereby it will violate the law of demand and supply.
3. Necessity goods-As the name suggests,these goods are necessary and people will buy irrespective of their price,for example consider electricity ,even with price rise you would consume if it is necessary,something like haircut,you wouldn't stop getting it despite price rise.
4. Inferior goods-Goods whose demand drops as consumer's purchasing power increases are inferior goods,for example demand for paying guest facilities will drop if everyone's income increases as people look for their own homes.It is like if you can spend more,you would upgrade your choices and not restrict yourselves to inferior goods.
5. Substituted goods-As name suggests,goods which can be used in place of another good,for example tea and coffee acts as substitute goods for each other for lot of people,so if price of one of substitute goods increases,people will switch to its substitute.
6. Complementary goods-Again as the name suggests,goods which complement each other or are used together generally.for example bread and butter,now in this case if price of bread increases,not only demand for bread will decrease but also of butter as people would not buy complementary good as well.
7. Normal goods-Unlike inferior goods,these goods are ones whose demand increases as purchasing power increases,so people will buy more of these goods such as if you were spending more on your styling,you would spend even more once your income increases.

Answer is complete.Thank you!