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CHAPTER 2
Problems
- Create a Production Possibilities Curve
Assumptions:
- Country Steelandia produces more hammers (capital good) and Country Doughland produces more pizza (consumer good) with all the resources in our world.
- During the analysis, technology does not change.
- All resources are fully employed (full production, full employment)
- The available resources can produce these goods in the following combinations only:
Use the table to create a Production Possibilities Curve below and label where Steelandia and Doughland will produce on the graph, Country Steelandia favours capital goods and Country Doughland favours consumer goods.
Production Alternatives Hammers (millions) Pizza (millions)
A 0 70
B 20 65
C 40 54
D 60 40
E 80 18
F 90 0
a. Which country consumes more of its current output?
b. Which country invests more of its current output?
c. Which economy should we expect to grow faster?
d. What is the benefit (advantage) of this faster growth?
e. What is the cost of this faster growth?
f. Assume Steelandia had unemployment. On the graph above, mark with an X where its economy would likely be located.
g. Would Steelandia now be more or less efficient (productive) than before? Why?
h. Suppose Doughland geologists then discovered a huge previously unknown oil deposit. Indicate on the graph above what you would expect to happen to the PPC.
Solutions
Create a production possibilities curve:
a) Doughland – produces a consumer good See Chart A b) Steelandia – produces a capital good See Chart A c) Steelandia d) Faster growth will allow more products to be produced with the resources e) Growing too fast can lead to waste and the inefficient production of goods. f) See Chart B g) Steelandia would be producing fewer hammers. h) Doughland will be able to produce more pizza and hammers only if there is increased demand for oil. See Chart C. This is an estimate. The PPC Shifted Right.
Circular Flow:
a. 4, 1 ,3 , b. i. Household, resources ii. Firm, products iii. Household, products
Chart A Chart B
Chart C
