Answer to Question #117961 in Macroeconomics for Muhammad Aashir

Question

Suppose that a technological advance occurs that affects the production of capital goods but not consumption goods. Show the effect on the production possibility frontier

Answer 1

Production possibility frontier (PPF) is a curve showing varying amounts of two products that can be produced when both of them are depending on the same finite resources.

The most common reason a production possibility frontier would shift is because of a change in technology like computers For instance if someone developed a faster computer .Since ceteris paribus more goods can be produced after the technological advancement.

Technological change is a term used to describe any change in the set of feasible production possibilities. A change in technology changes the combinations of inputs required in the production process. An improvement in technology usually indicates less costly inputs are needed. If the cost of production is lower profits will increase dramatically and producers will produce more. With more produced at every price, the supply curve will shift to the right meaning an increase in supply and a decrease in prices. An improvement in technology shifts the production possibilities frontier outward.

Finally, we could add some dynamics into the shifting process by allowing for a choice between capital goods, or consumption goods and analyze how much the production possibility frontier shifts out. 

The graph below shows the production frontier curve of capital goods against consumer goods.