Introduction to Economics
Uploaded by Effect on May 09, 2007
Question 1
(a) ‘The production possibilities frontier is the boundary between those combinations of goods and services that can be produced and those that cannot’ (McTaggart, Findlay & Parkin, 2007). The PPF compares two products and a model economy is used where everything remains the same (ceteris paribus), i.e. production cost, demand and supply etc remain the same.
Here is an example of a PPF using two goods, milk and steak. On the x-axis there is the amount of milk which can be produced in litres and on the y-axis there is the amount of steak which can be produced in kilograms.
Each position on the PPF is efficient. It uses all the resources available. Any point within the area of the PPF is obtainable, but resources are being wasted. For example, if there are 10 cows that can either be used for producing milk or steak, and we milk one and slaughter the other, the other eight are out on the field eating grass not producing anything, i.e. we could be either milking them or slaughtering them. Any point outside of the PPF is unobtainable, as there are not enough resources available.
The marginal cost is the cost of producing one more unit of it. The gradient of the PPF shows the marginal cost. As more steak is produced, the marginal cost of producing milk increases. That is, the more cows that we slaughter, the less milk we are able to produce.
The marginal benefit is the benefit received from consuming one more unit of it. Marginal benefit is measured by the most that someone is willing to pay for another unit.
As all points on the PPF are efficient, which one point on the PPF is more important than any other? It is the point where the resources are allocated efficiency, that is, we are not trading off another good that we value higher than the other. This point is found when the marginal cost is equal to the marginal benefit.
As we can see, the point of intersection of the marginal benefit and marginal cost shows us the most efficient amount to produce, in this case, 5 units of steak and 20 units of milk.
(b) ‘There are two major influences which affect economic growth. They are technological change and capital accumulation.
Technological change is the development of...