Question

Explain the concept of the Production Possibilities Curve. What does it represent in terms of our Macro economic system?

Using your own data, draw a curve which represents the Law of Increasing Opportunity Costs and explain how those costs are considered as Increasing.

Explain how the PPF is similar to the Business Cycle concept.

Answer 1

Part A

We know that the production possibility curve represents maximum possible output combinations of two goods or services that an economy achieved by utilizing all of its resources efficiently and effectively. The production possibility frontier shows the economic growth. Here point in PPC shows the efficient use of all resources in the economy. In macroeconomic terms we say that when a country requires achieving a point in PPC, then country should increase their factor of production, increase in the productivity and also improve in the level of technology. So improvement in the production of both goods represents the improvement in the welfare of the country.

Part B

We know that the law of increasing opportunity cost states that a country increases the production of good, then greater the opportunity cost when producing an extra unit of that commodity. In data,

Bundle	Rice	Wheat	Opportunity cost
A	0	20	0
B	1	18	-2
C	2	15	-3
D	3	11	-4
E	4	6	--5
F	5	0	-6

The above production possibility curve is represented below:

In the diagram we represent the increasing opportunity cost. The PPC is convex because of increasing opportunity cost represented in the table.

Part C

We know that the business cycle shows that the ups and down or peaks and troughs in the economy over a period of time. Generally, there are four sections of the business cycle models such as expansionary, peak, contractionary and trough. When we compare business cycle with the production possibility frontier, then we realized that the peak does not happen in on or beyond the PPF. The peak always happens inside the PPF. If the economy faces expansionary then the economy faces increasing trends of prices. The contractionary times the economy faces deflation.