Question

Short answer. Paragraph form:

What economic concepts are represented in the production possibilities model? Be thorough. Draw a ppf and show how current choices of consumption and investment can lead to more or less future growth.

Answer 1

Production possibility frontier illustrates the following economic concepts.

1. Scarcity: because of the problem of scarcity, the consumer needs to choose between amounts of goods which can bring maximum satisfaction to him. By increasing earnings or resources, the consumer can enhance its satisfaction level also. And PPF is all about depicting different choices.
2. Resources and their employment: PPF shows the combination of goods and services a country can produce by its limited resources. The method by which we combine significant elements leads to the figure of PPC.
3. Tradeoffs: All the points on PPF shows different combination of goods and services when country’s all resources are employed. So, here economy has to trade off one good or service to get the other good or service. Movement in PPF shows cost (opportunity cost) of trading off one good for another.

   In the above figure, we can see that, country A has chosen the point U (C_A) which depicts zero investment and maximum on consumption goods but country B chose point S(C_B) where there is less consumption than country A but some amount of investment. Now in future, the investment will increase the capital stock of country B and shifts the PPF_A of country B to rightward to PPF_B which depicts future growth.