1. The economy is in a recession. 10% of the labor force in unemployed.
happen if the rate of unemployment falls from 10% to 6%?
The production possibility curve shows the combinations
of two goods that can be produced if the economy is at
full employment and using the best technology available. If there is unemployment, the economy is not producing
as much as is possible. This is represented by a combination of goods inside the curve. Therefore, if there is 10%
unemployment, the economy is inside the curve. If the economy is at 6% unemployment, this is still unemployment,
so the economy is still inside the curve, but it can produce larger combinations of goods and services, so it will
be closer to the curve. REDUCTION OF UNEMPLOYMENT DOES NOT SHIFT THE CURVE. IT DOES
NOT CHANGE WHAT IS POSSIBLE IF THE ECONOMY IS PRODUCING AT FULL EMPLOYMENT
AND USING THE BEST TECHNOLOGY AVAILABLE.
2. Suppose society produces two goods, capital goods and food. Suppose
there is a breakthrough in biogenetics which
produces a new type of corn that has more ears of corn per stalk?
The breakthrough in biogenetics affect only the
production of food. It does not change what the economy can do if
is only producing capital goods. Therefore, it will only affect the economy, and shift the curve further to the right, if
some corn is being produced.
3. Suppose there is a war?
If resources are destroyed, then the production possibility will shift inward.
4. Suppose the society produces consumer goods and capital goods. What
if the level of education rises?
Education is like technology; it increases productivity.
When people have more education it will increase the
productivity of labor in producing both consumer goods and capital goods. The curve will shift out on both axes.