Important Assumptions Related to Production Possibilities Curve

26 Apr

Let’s now discard the first three assumptions underlying the production possibili­ties curve and see what happens.

Unemployment and Productive Inefficiency

    The first assumption was that our economy was achieving full employment and pro­ductive efficiency. Our analysis and conclusions change if some resources are idle (unemployment) or if least-cost production is not realized.Any points on PPC represent maximum outputs possible to be produced; they illustrate the combinations of goods that can be produced when the economy is operating at full capacity—with full employment and productive efficiency. With unemployment or inefficient pro­duction, the economy would produce less than each alternative shown in the table.
Graphically, we represent situations of unemployment or productive inefficiency by points inside the original production possibilities curve.  A move toward full employment and pro­ductive efficiency would yield a greater output of one or both products.
A Growing Economy
   When we drop the assumptions that the quantity and quality of resources and tech­nology are fixed, the production possibilities curve shifts positions—that is, the potential maximum output of the economy changes.
    Although resource supplies are fixed at any specific moment, they can and do change over time. For example, a nation’s growing population will bring about increases in the supplies of labour and entrepreneurial ability. Also, labour quality usually improves over time. Historically, the economy’s stock of capital has increased at a significant, though unsteady, rate. And although we are depleting some of our energy and mineral resources, new sources are being discovered. The development of irrigation programs, for example, adds to the supply of arable land.

The net result of these increased supplies of the factors of production is the ability to produce more goods . Thus, 20 years from now, there  may be greater abundance of resources ,therefore, this will result in a greater potential output of one or both products at each alternative. Soci­ety will have achieved economic growth in the form of an expanded potential output.

But such a favourable change in the produc­tion possibilities data does not guarantee that the economy will actually operate at a point on its new production possibilities curve. Some 15 million jobs will give China full employment now, but 10 or 20 years from now its labour force will be larger, and 15 million jobs will not be sufficient for full employment. The produc­tion possibilities curve may shift, but at the future date the economy may fail to produce at a point on that new curve.
     Our second assumption is that we have constant, unchanging technology. In reality, technology has progressed dramatically over time. An advancing technology brings both new and better goods and improved ways of producing them. For now, let’s think of technological advances as being only improvements in capital facilities— more efficient machinery and equipment. These advances alter our previous dis­cussion of the economic problem by improving productive efficiency, thereby allowing society to produce more goods with fixed resources. As with increases in resource supplies, technological advances make possible the production of more goods.
Thus, when either supplies of resources increase or an improvement in technol­ogy occurs, the production possibilities curve shifts outward and to the right. Such an outward shift of the production possibilities curve represents growth of economic capacity or, sim­ply, economic growth: the ability to produce a larger total output. This growth is the result of (1) increases in supplies of resources, (2) improvements in resource qual­ity, and (3) technological advances.
The consequence of growth is that our full-employment economy can enjoy a greater output of goods. While a static, no-growth economy must sac­rifice some of one product in order to get more of another, a dynamic, growing economy can have larger quantities of  products.
Economic growth does not ordinarily mean proportionate increases in a nation’s capacity to produce all its products.
ECONOMIC Growth An outward shift in the production possibil­ities curve that results from an increase in resource supplies or quality or an improvement in technology.

One Response to “Important Assumptions Related to Production Possibilities Curve”

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