Question

1. Please give a broad definition of “production possibilities curve” and explain the sources of economic growth that shift production possibilities curve. (You are expected to give a detailed explanation and examples, but you don’t need to draw diagrams).

Answer 1

Production Possibility Frontier(PPF) shows the capacity(frontier) that the economy can produce at. Generally accepted factors increasing/ decreasing capacity are quality and quantity of factors of production.The production possibility curve portrays the cost of society's choice between two different goods. An economy that operates at the frontier has the highest standard of living it can achieve, as it is producing as much as it can using the same resources. If the amount produced is inside the curve, then all of the resources are not being used

An increase in the quantity of factors of production (land, labor, capital) will cause a right-shift of the PPC. So will improvements in productivity (using the factors we have better). A good example is improved technology, which increases labor or capital productivity. Better farming methods, robots and the like.Increase in resources, such as increased adult population, increased immigration, improved work ethics, increased spending on training and educating workers, increase motivation of workers, increased retirement age, deceased school leaving age, increased female participation in labour force, increased occupational and geographical labour mobility, discovery of more natural resources, infrastructure development, overcoming an energy crisis, increased investment in productive capital etc can all shift a production possibility curve (PPC)towards right.

If we lose factors, then the PPC will shift left. In a war, for example, a lot of people are lost, and capital can be destroyed. The post-war PPC may be substantially left of the pre-war PPC. Think Germany, or Japan, after WW II.