Question

Within a PPF framework, explain each of the following: (a) a disagreement between a person who favors more domes-tic welfare spending and one who favors more national defense spending, (b) an increase in the population, and (c) a technological change that makes resources less specialized.

Answer 1

Answer:

A. Movement on the PPC

B. Rightwards / Outwards shift of PPC

C. Less Concavity of PPC

Explanation:

Production Possibility Curve is combination of two goods that an economy can produce, given resources & technology (efficient utilisation).

• It is a downward sloping curve as more of one good can be produced by sacrifising other good, same resources & technology.
• It is concave curve because of increasing marginal opportunity cost, i.e increasing amounts of a good to be sacrifised to gain additional amount of other good, as resources are not equally efficient in production of both goods.
• Points on PPC reflect full utilisation, points under PPC reflect under utilisation, points above PPC are unattainable.

a) A disagreement between persons favouring more domestic welfare spending or national welfare spending : Is just an issue of reallocation of same resources, technology. So, PPC doesn't change & there can only be movement on the PPC (more of one good, less of other good)

b) An increase in population : leads to increase in human resource & hence the PPC shifts outwards / rightwards as the production potential of economy rise with more human resource.

c) Technological change that make resources less specialised : would reduce resources' efficiency gap in production of two goods. So, Marginal Opportunity cost reduces & hence the PPC becomes less concave.