Question

QUESTION ONE [30]

1.1 “The production possibility frontier (PPF) for two goods represents all possible combinations of goals when resources are fully utilised, for an economy at a specific point in time. However, if an economy grows then the PPF can shift outwards”. In terms of the above statement, discuss how economic growth can be illustrated using the model of the PPF. Include in your answer the factors that contribute to economic growth. (20)

1.2 The production possibility frontier (PPF) illustrates productivity efficiency and allocative efficiency. Explain the meaning of each of these two terms and discuss how the PPF can be used to illustrate these two concepts. (10)

Answer 1

Sol 1.1) PPF illustrares economic growth by shifting rightward.

The rightward shift of PPC shows that production possibility of both the goods will increase.It is possible if:

(i) resources utilized in the production of both the goods will increase or

(ii) Technology used in production will improve or

(iii) both resources and technology improves

When resources and tech related to good X and good Y increases/improves,both the goods can be produced more.There will be economic growth.

sol 1.2)

Productive efficiency:

It means resources are utilised fully and efficiently while producing goods.They are not wasted or underutilised.

If producer wants to increase production of one good,some units of other good must be sacrificed.

Any point lying on PPC shows such combinations of goods that can be produced by utilising resources fully and efficiently.If point is lying inside PPC shows unemployment or underutilisation of resources and thus productive inefficient .

point C and D shows productive efficiency.Resources are fully and efficiently utilised on these points and if producer moves to D from C,units of good Y must be sacrificed.

Point E shows productive inefficiency because it is lying inside the PPC means resources are not fully and efficiently utilised.While moving to C or D from E ,it is not required to sacrifice units of any good.

Allocative efficiency:

It means to produce such combination of goods which society needs or desires.

Resources must be allocated in such a way that society needed combination can be produced.

Any point on PPC shows different combinations and the qty of possible production level.Suppose a country is having more of poor people and less of rich people must produce more of bread and less of cars.

For such economy , producer must choose such combination having more of bread and less of cars.It is known as allocative efficiency.

In the above diagram,point A shows allocative efficiency if country is having more of poor people and less of rich people.A shows more of bread and less of cars.

If country is having more of rich people as compared to poor , point B will show allocative efficiency.