Theory question 103
Basic Concepts(a) What is a production possibility curve?
(b) Draw a production possibility curve and indicate any: (i) point P, where resources are fully utilized; (ii) point U, where resources are under-utilized; (iii) point X, where production is not feasible.
(c) Explain any two factors that can make production at point X feasible.
(d) Why is the production possibility curve negatively sloped?
Show the model answer
(a) A production possibility curve shows the different combinations of two goods that an economy can produce when all its resources are fully and efficiently used with given technology.
(b) Concave curve between the two axes (each axis one good): P on the curve; U inside the curve; X outside the curve.
(c) Any two: improvement in technology; discovery of new resources; increase in the quantity of labour or capital (investment, population growth); better education and skills; foreign aid/investment. These shift the curve outward so X becomes attainable.
(d) Resources are scarce: to produce more of one good, some of the other must be given up (opportunity cost), so the curve slopes downward.
Points on the curve: full use; inside: under-use; outside: unattainable now.