Illustration of Fundamental Economics Concepts

Topics: Economics, Production-possibility frontier, Opportunity cost Pages: 5 (1746 words) Published: April 10, 2013
Introduction to Economics
Write an essay in which you describe/evaluate how the production possibility curve helps to illustrate fundamental economic concepts. In this essay, I am going to evaluate the second important fragment of economics- Production possibility curve or simply PPF. The importance of understanding the method and analysing elementary economic diagrams is significant for progressing into more depth and other essential parts of the learning of economics. The starting point in economics is to measure what we can produce. Everyone’s infinite desires cannot be fulfilled due to scarce resources; therefore it is a limit to what our economy can produce. This can be shown and analysed by PPF or Production Possibility Frontier. The PPF is used to evaluate the effectiveness of production processes if all resources in the economy are efficiently used. In other words, the PPF shows the maximum output that can be produced in an economy at any given moment, given certain amount of resources available. Commonly, when particular economy utilizes its scarce resources to the fullest, they always produce on PPF. In case production is below the PPF boundary, the economy does not fully utilize its resources. The PPF does not always have to be drawn as a curve. Say the opportunity cost for producing two products is constant, and then I draw the PPF as a straight line. The gradient of that line is a way of measuring the opportunity cost between two goods, in my case quantity of guns produced and quantity of butter produced. A straight line PPF shows a constant opportunity cost between guns and butter. Increasing output of butter from point C to point D implies giving up 25 units of guns production. The marginal opportunity cost for each extra unit of butter is 25 units of guns. Because the two products are almost identical in this case and can be produced equally efficiently using the same resources, the opportunity cost of producing one over the other remains constant between two extremes of production possibilities.

As shown in the diagram below, an economy might have enough resources as its disposal to be able to produce B amount of cotton and same B amount of wine; in that case all resources would have been efficiently employed. If the economy were now to produce more cotton than wine, it would have to give up some of its production of wine. This is because the production of cotton has an opportunity cost- in this case the production of wine. The more cotton that is produced, the less wine can be produced. The illustration below shows the different combinations of economic goods which an economy is able to produce if all resources are fully and efficiently used. The economy therefore can be at the point B producing the same amount of cotton and wine; it can be at the point C producing more cotton than wine. Point A, B and C all represent the most efficient allocation of country’s resources. Say more wine is in demand the economy will produce on its point A, in that case the country will run-through a specialization (the term will be explained briefly in the last part of the essay). However the opportunity cost of that is the lost output of produced cotton.

Point X, on the diagram, means that the country’s resources are not being fully utilized or that there is unemployment. Point Y represents a production level that is unreachable by this economy. However, if there is an improvement in the economy whilst the level of land, labour and capital remained the same, the needed time to pick cotton and grapes would be reduced therefore output level would increase and the PPF would be pushed to the right and then Y would show the most efficient allocation of resources. Now, I am going to describe thoroughly and illustrate the term economic growth. By definition, the PPF shows the maximum level of output that the economy can produce. Though, it might be able to move outwards, as shown below, if there is economic...

Bibliography: R, Lipsey, C, Harbury. (1992), First Principles of Economics. Second edition, London: George Weidenfeld and Nicolson Ltd.
A, Anderton. (2000), Economics, Third edition, Legoprint, Italy: Causeway Press Limited.
Investopedia, www.investopedia.com, http://www.investopedia.com/university/economics/economics2.asp#axzz2BwbLvhuB By Reem Heakal Accessed on 11/11/12