Answer to Question #86926 in Macroeconomics for aisha

Question

What assumptions need to be taken into consideration when drawing a PPF curve?

Answer 1

According to Economics McConnell and Brue, production possibilities curve illustrates the law of increasing opportunity costs. The concavity of the curve indicates the effect of the law of alternative costs, when, with an increase in the output of one type of goods, it is necessary to reduce the output of the second type of goods, due to limited resources. In general, when drawing a production possibilities curve, there are four simplifying assumptions: 

1. Full employment and production efficiency. I.e. all available resources are involved in production.
2. A constant amount of resources. A limited amount of resources can be redistributed between different users.
3. Unchanged technology
4. Two products. The economy produces only consumer goods and capital goods.