1. Define the production possibilities curve in your own words.
2. Could a nation's production possibilities curve ever shift inward? Think about the production possibilities frontier. The graph sets the line for the attainable and the unattainable. A country always wants to produce on the PPF line because that is the maximum production...outside of the PPF line is unattainable, and inside this curve it is inefficient (the country is not using its resources wisely). The PPF can shift outward with new innovations and technologies as well as trade. Its shift outward is a result of economic growth. So it can shift inward with negative growth--using up all your resources. Resources means any factor of production. Like labor, natural resources, and machinery. If Saudi Arabia runs out of oil, its PPF will shift inward. If there is an outbreak of smallpox that kills off a lot of the population, the PPF shifts inward. The country can no longer produce at the same PPF because its resources have been used up or decreased in some way. What are TWO factors that may cause this to occur?
3. How can an economy achieve points that are outside the production possibilities curve?
Use the following graph to address questions 4 and 5 below. Consider a production possibilities curve (PPC) for an economy that produces farm goods and factory goods. It can produce the combinations listed in the table. Notice if the economy produces more farm goods, it will give up factory goods resources.
|
Point on PPC
|
Farm goods
|
Factory goods
|
|
b
|
10
|
700
|
|
c
|
20
|
650
|
|
e
|
60
|
400
|
|
f
|
70
|
120
|
4. If the economy wanted to move from point b to c, what would be the opportunity cost of increasing farm production by 10 tons? Your answer should be in terms of factory goods.
5. Compare the movement from b to c and from e to f. What do you notice about opportunity cost? Explain.