In: Economics
Part 1 Below is a production possibilities table for consumer goods (butter) and capital goods (guns).
Production Possibilities |
|||||||
---|---|---|---|---|---|---|---|
Type of Production |
Production Alternative A |
Production Alternative B |
Production Alternative C |
Production Alternative D |
Production Alternative E |
Production Alternative F |
Production Alternative G |
Butter |
0 |
1 |
2 |
3 |
4 |
5 |
6 |
Guns |
14 |
13 |
11 |
9 |
7 |
4 |
0 |
Graph the data provided in the table using Excel. (Hints: Type your data into an Excel spreadsheet. With your mouse, highlight the data only. Go to insert. Click on scatter. Click on smooth lines chart. Select the line chart. Plot data drawing line.)
Based on the graph you created, complete the following:
Identify the specific assumptions that underlie the production possibilities curve.
Assumptions of PPC
Two Goods: A simplifying assumption of production possibilities
analysis is that the economy produces only two goods. In that the
economy actually produces tens of thousands of different goods,
this is one of these seemingly unrealistic assumptions. It is,
however, a useful simplifying assumption. Limiting the analysis to
two goods means that only two dimensions are needed to display
graphs and curves. Two dimensions can be shown easily on paper or a
computer screen. But, best of all, most conclusions reached for two
goods and two dimensions apply, in principle, to tens of thousands
of goods. And if necessary, more than two goods can be handled
using advanced mathematics.
Fixed Resources: A second assumption is that the economy has
limited and fixed quantities of resources. This is both a
reasonable assumption, given the limited resources aspect of the
scarcity problem, and also one that makes for useful and
interesting analyses. There is no question that the economy has
limited amounts of labor, capital, land, and entrepreneurship at
any given time. This is the reasonable aspect of this assumption.
However, these quantities of scarce resources are also bound to
change, especially increase, over time. The initial assumption of
fixed resources makes it possible to analyze the consequences of
any changes, especially as it affects economic growth.
Fixed Technology: A third assumption is that the economy has a
fixed level of technology. Technology is the information and
knowledge that society has about the production of goods and
services. This assumption works much the same as the fixed
resources assumption. At any given time, the economy has a certain
level of technology. As such, it seems entirely reasonable to make
this assumption. However, technology does increase over time. The
analysis can then be used to see what happens when technology
changes.
Technical Efficiency: The last assumption is that resources are
used in a technically efficient manner. Technical efficiency means
there is no waste in production, that the most physical output is
obtained from the resource inputs. This can also be thought of as
engineering efficiency. If, for example, 1 1/4 cups of flour, 3/4
cup of sugar, and 2 eggs are used to make two dozen cookies, and a
baker uses 1 1/4 cups of flour, 3/4 cup of sugar, and 2 eggs, then
two dozen cookies are produced. No waste. No mistakes. Note that
technical efficiency does not mean consumers actually want the
goods, only that the maximum quantity is produced.