Question

Compare the Production Possibilities model with the Budget Constraint model

• Brief definition of a model.
• Brief interpretation of the problem covered in both models.
• Identify the similarities of both models.
• Identify the differences in both models
• Explain the importance of analyzing production and consumption through each model.

Answer 1

Answer

The production possibilities model discusses the scarcity and efficiency of resources in a country. The budget constraint model discusses the consumer choices between two goods given their prices and consumer's money income.

The production possibilities model shows how a country can produce different combinations of two products with the given amount of available resources and technology in the country. The budget constraint model shows how a person or a society can purchase different combinations of two products with the given amount of budget and product prices.

In a economy, the resources are fixed but wants are unlimited. The basic problem in an economy is ,what to produce, how to produce and for whom to produce with these given amount of resources. The problem the production possibilities model discusses that how a country can efficiently use all of its available resouces and technology so that it can produce the optimal amount of two products that the country needs. On the other hand, for an individual or a society, the budget is fixed for a certain period of time. The problem is that with this limited budget, a consumer or a society must meet all of its needs. The problem that the budget constraint model discusses is the maximization of utility subject to the budget constraint, i.e., with the given budget and prices of the products, how an individual or society can maximize utility by consuming two productrs optimally.

The similarities - Both the models discusses of scarcity and efficiency. In the production possibilities model, as the resources are fixed in a country, so the production of one good can not be increased without decreasing the production of anothet good. With the decreasing of the production of one good, the resources are released from that sector and then are utilised in the other sector whose production needs to increase. In the budget constraint model, the budget is fixed. So given the prices and budget, the consumption of one good can not be increased without decreasing the consumption of another good.

The differences - The production possibilities model discusses about the efficient uses of the given resources of a country, so that the country can produce the optimum and maximum possible combinations of two goods. The budget constraint model discusses the consumer's choice between two goods, so that the consumer can maximize utility with the given amount of budget and product prices. The production possibilities curve is bow shaped and concave to origin because of the increasing opportunity cost of production. The budget line is a negatively sloped straight line because the slope of the budget line (ratio of the prices of two products) is constant.

The importance of the production possibilities model is that it discusses the production choices of a country. What a country should produce by using its available resources efficiently is discussed in production possibilities model. The importance of the budget constraint model is that it discusses the consumer's consumption choice and preferences between two goods when his/her money income and prices of the products are given. With the consumption coice and preference. The budget constraint model helps us to know the effective demand of consumer, i.e., what the consumer is able to spend given a specific budget constraint.

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