Explain how production possibility curves can be used to demonstrate the problem of unemployment, effects of technological change and the benefits of economic growth. Human wants are unlimited and resources are scarce. In order to satisfy these wants, all societies face the problem of allocating these scarce resources to producing the wanted products. These decisions greatly affect the economy and will contribute to the movements of growth. A graph that visually represents the results of the decisions and maps the growth of the economy is the production possibility curve. Production possibility curves (PPC) are graphical models used to demonstrate the different opportunity costs that are involved when individuals or communities make choices on how much of each product to produce. The graph depicts the different combinations of two alternative products that can be produced, given technology and a fixed amount of resources. The two axes represent the amount of each product produced and the curve (frontier) shows the maximum amount of each resource able to be produced when all of the resources are used to their full capacity (refer to Figure 1. Most diagrams discussed will only deal with straight frontiers for the purpose of a clear visual).
The resources are the factors of production which consists of natural resources, human labour, capital goods and enterprises. The position of the economy is often shown by a dot or a cross and its position depends on the economy’s production status. The PPC also makes a number of assumptions including the fact that economy will produces only two different goods, the state of the technology will remain constant, and the quantity of the resources remain the same and are both fully employed and used efficiently. The production possibility curve is thus able to graphically represent the problems of unemployment, the effects of technological change on the products produced and also show the benefits of economic growth in an economy. Production possibility curves can used to demonstrate the problems of unemployment when producing the products in the economy. In the graph, it takes all of the factors of production into account. Thus unemployment will mean that not all of the resources are being fully engaged and used to their full potential.
The frontier in this case will not change, however the position of the economy will move below the curve. For example (refer to Figure 2), if the economy is producing two products X and Y, the frontier does not change and instead the position of the economy on the graph will shift depending on the amount of resources are not being used. The further away the economy is from the curve, the more resources unemployed. In this situation, the graph signifies that there is an inefficient allocation of resources. It conveys the economy is neither satisfying the maximum amount of wants nor achieving minimum opportunity costs. Essentially the economy is not using its resources to their full potential, or sacrificing the lowest amount of opportunity costs to produce the products. By shifting the dot around, the PPC makes it very obvious to where in economy is at in productions efficiency and thus can influence decisions in order to overcome the problem of unemployment. The production possibility curve is also able to display the effects of technological change on the production of the products.
Newer technology creates more efficient production methods and thus allows the economy to produce more of one product without an increase in opportunity costs. The application of newer, more productive technology is represented by an outward shift in the respective product axis. In the example (refer to Figure 3), due to technological advancements it has made producing product X more efficient, thus allowing more of product X to be produced. The lack of movement in the Y axis portrays how there was no increase in opportunity cost for producing product Y when more of product X was produced. The shift also shows the new frontier for the economy. The amount of shift can be adjusted to provide a model of the future economy if it decides to go through with technological advancements in one area. Therefore, the PPC is a great model representation of how technological changes can affect the production possibilities on an economy.
Production possibility curves enable the illustration of how the process of economic growth occurs. Economic growth occurs when more resources are able to be used or existing resources are used more efficiently. Economies often have to decide whether to produce more of capital goods or consumer goods. Producing more consumer goods will satisfy the wants immediately and thus provide higher standard of living in the present, compared to producing more capital goods which does not satisfy many wants right away. However, it provides the economy with larger production abilities later on and thus will be able to satisfy more wants in the future. In Figure 4 (the figure deals with concave frontier to represent more of a realistic approach to growth), the graph is showing the production of either consumer or capital goods. The economy at Point A is prefers producing more consumer goods than capital goods.
The economy at Point B is producing more capital goods. Both economies are on the curve C. If the economies at both A and B shift outwards to the curve C1, it will represent that both economies are able to produce more of each product. This clearly demonstrates the benefits of economic growth on production possibilities. Not only are does it enable the more production of each product as a result of more resources used, the economy will be able to satisfy more wants and thus enjoy a higher standard of living. The PPC can also demonstrate how the economy at Point B is more likely to experience economic growth as the preference of more capital goods produced allowed greater capacity to produce more goods in the future.
Using the PPC, it is able to display the different amounts of growth in the various positions and will thus help demonstrate the results. In all, the clear movements of the points from one curve to another visually represent the benefits of economic growth. Production possibility curve are excellent graphs that convey the problems of unemployment, clearly represent the effects of technological change and demonstrate the benefits of economic growth. The movements in graph can show different results and thus can help make decisions on what to produce.