Draw a production possibilities curve for a hypothetical economy producing capital good and consumer goods. Suppose a major technological breakthrough occurs I the capital goods industry and the new technology is widely adopted only in this industry. Draw the new production possibilities curve .Now assume that technological advance occurs in consumer goods production .Draw the new production possibilities curve
To draw a Production Possibilities Curve (PPC) for a hypothetical economy producing capital goods and consumer goods, you need to understand the concept of opportunity cost and how it relates to the trade-off between producing different goods.
1. Start with the original PPC:
First, draw a graph with two axes. The x-axis represents the quantity of capital goods produced, and the y-axis represents the quantity of consumer goods produced. Plot points on the graph that represent different combinations of the two goods that the economy can produce.
2. Identify the slope of the PPC:
The slope of the PPC represents the opportunity cost of producing one good in terms of the other. The steeper the slope, the higher the opportunity cost. This is because to produce more of one good, the economy must sacrifice some of the other good.
3. Technological breakthrough in the capital goods industry:
Suppose a major technological breakthrough occurs in the capital goods industry, and the new technology is widely adopted only in this industry. This will lead to an increase in the productivity and efficiency of producing capital goods. As a result, the economy can produce more capital goods with the same amount of resources, without sacrificing the production of consumer goods.
To draw the new PPC after the technological breakthrough in the capital goods industry, shift the entire PPC outward (to the right) along the x-axis. This indicates that the economy can now produce and consume more capital goods without a proportionate reduction in the production of consumer goods.
4. Technological advance in consumer goods production:
Next, assume that a technological advance occurs in consumer goods production. This means that the economy can produce more consumer goods with the same amount of resources, without sacrificing the production of capital goods.
To draw the new PPC after the technological advance in consumer goods production, shift the entire PPC outward (upward) along the y-axis. This indicates that the economy can now produce and consume more consumer goods without a proportionate reduction in the production of capital goods.
Remember, the specific shape and position of the PPC will depend on the magnitude and impact of the technological breakthrough or technological advance. The general idea, however, is that the PPC will shift outward to reflect the increased production possibilities in each respective industry.