QUESTION ONE [30] 1.1 Explain the purpose of the production possibility frontier as a basic economic...

QUESTION ONE [30]
1.1 Explain the purpose of the production possibility frontier as a basic economic model.
Use a diagram to motivate your answer. (15)
1.2 Describe how the production possibility frontier can be used to illustrate economic
growth. (15)

Expert Solution

1.1

Purpose of the production possibility frontier (PPF) is to tell the combination of output produced at a given level of resources. Any output combination that is on the line of PPF, is considered as efficient level of output combination. As an economic model, PPF helps the economy to identify the level of production that is done as per the specialization of labor and availability of capital. It is exemplified as follows.

In the above PPF curve, A and B is the efficient output as these combinations are on the PPF curve. Though C is inefficient output and point D is the output that cannot be achieved.

1.2

When PPF curve moves outward, then economy grows and more output is produced. Though, with inward movement of PPF curve, the economy shrinks. So, the movement of PPF shows the economic growth. Besides, higher production of capital goods as per the PPF, shows higher economic growth and vice versa.

Rahul Sunny answered 1 year ago

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