Answer to Question #170103 in Microeconomics for Racheal Agyei

Question

Draw a production possibility curve (PPC) and

i. State any two assumptions underlining the drawing of the PPC.

ii. Use it to explain the concepts of scarcity and opportunity cost.

iii. Explain any one factor that can lead to the expansion or contraction of the PPC.

iv. Analyze the implications of the slope and shape of the PPC you drew.

 

2. i. Given the normal demand curve, explain (using diagrams) what will happen to price and 

quantity demanded when there is a change in supply.

ii. Given the normal supply curve, explain using diagrams, the direction of movement of 

price and quantity when there is change in demand.

Answer 1

1. i. The production possibility curve is based on the following assumptions: (1) Only two goods X (consumer goods) and Y (capital goods) are produced in different proportions in the economy.

(2) The same resources can be used to produce either or both of the two goods and can be shifted freely between them.

ii. PPF shows the concept of scarcity, because the limited amount of output is possible to produce, ot also shows the concept of opportunity cost, because you need to give up some quantity of one good to produce more of another good.

iii. The technological advance can lead to the expansion, and a huge draft can lead to the contraction of the PPC.

iv. The downward slope of the production possibilities curve is an implication of scarcity. The bowed-out shape of the production possibilities curve results from allocating resources based on comparative advantage.

2. i. Given the normal demand curve the price will increase and the quantity demanded will decrease when there is a decrease in supply and vice versa.

ii. Given the normal supply curve, both price and quantity will decrease when there is a decrease in demand and vice versa.