Question

1. a) How would economic contraction brought about by Covid – 19 slowdown be represented using production possibilities curve?

b) How is improved technology resulting in increased productivity represented using production possibilities curve?

One graph for each question.

Answer 1

Production possibility curve shows various combinations of two goods that the economy canproduce by fully utilising its available resources. So any point on the production possibility curve shows efficiency and fuller utilisation of resources in the economy. That means all the available resources are utilised fully to produced various combinations of goods and services.

In the first case, if there arises an economic contraction or an economic slowdown as a result of covid-19 that will cause the entire production possibility curve shifts downward to the left or move towards the origin as shown in the figure below.

Initially the economy is at production possibility curve PP. If there arises and economic slowdown due to covid-19 that will cause the resource availability go down and shift the production possibility curve from PP to P1P1, green curve shown in the figure.

So at new production possibility curve P1 P1,the economy can produce fewer goods and services than the earlier production possibility curve PP.

In the second case improved technology resulting in increased productivity brings the economy in a better position and that causes the entire production possibility curve shifts upward to the right from the origin. At this new production possibility curve the economy can produce more goods and services than the earlier. This is shown in the figure below

In this figure initially the economy is at production possibility curve PP. As a result of improvement in technology and increased productivity, the economy will move upward to the right from the origin from PP to P2P2.

At this new production possibility curve P2P2 the economy can produce more goods and services than the earlier production possibility curve PP.