"Explain how production possibilities curves can be used to demonstrate the problem of unemployment, the effects of technological change and the benefits of economic growth."A production possibility frontier (also known as production possibility curve) represents all the possible combinations of the production of two types of goods and services that the economy can produce at any given time through graphical means. It is used to clearly demonstrate the problem of unemployment, the effects of technological change and the benefits of economic growth of a modified view of an economy.
A typical production possibility frontier is based on four simplifying assumptions:1. The economy only produces two types of goods and services2. The state of technology remains unchanged3. The quantity of resources remains unchanged4. All resources are fully employedUsing the given assumptions, a production possibility frontier may be constructed. Fig 1.1 shows all the maximum possible combination of the production of wheat and cars in an economy when all resources are employed.
Economic Growth and the Production Possibility Cur...
economics
EconomicsSociety must make decisions on which combination is most desirable, and thus, involving an opportunity cost. This is shown at point C on the line where in order to obtain 40 units of clothing, 50 units of food must be given up. The line AB shows the ideal spot in which an economy should lie as it signifies that all resources are efficiently employed, however in reality, this is often not the case and the problem of unemployment arises. Unemployment in an economy can be clearly identified in a production possibility frontier as the position of the economy would be shifted into the area within the curve. This is demonstrated in Fig 1.1 by X.
Economy X is illustrated as producing 100 units of wheat and 40 units of cars, significantly reduced from the potential production of 150 units...