Application Exercise 1i
Questions
1) Discuss the implications for the economy if it produces at point F.
Producing at point F would not maximise living standards because all resources are used to produce junk food to the detriment of our health and longevity.
2) Discuss the implications for the economy if it produces at point A.
Producing at point A, while clearly a better choice, might also not maximise living standards because all resources are used to produce health food. To the extent that the production and consumption of some ‘junk food’ actually enhances our welfare (e.g. reduces the stress associated with cooking and provides us with greater choice), then options B and/or C might be superior options for an economy.
3) Discuss the implications for the economy if it decides to reallocate its resources and move from production point F to D.
Moving from point F to 0 involves allocating resources away from the production of junk food and towards the production of health food. This necessarily involves an opportunity cost (the production/consumption of junk food will be sacrificed) which is measured in terms of 80,000 units of junk food production being foregone to make way for the production of 140,000 units of health food.
4) Identify the opportunity casts associated with a change in production from point A to E.
Moving from point A to E involves allocating resources away from the production of health food and towards the production of junk food. This necessarily involves an opportunity cost (the production/consumption of health food will be sacrificed) which is measured in terms of 100,000 units of health food production being foregone to make way for the production of 160,000 units of junk food.
5) Assume that the economy produces 130,000 items of health food and 100,000 items of junk food. Label this point G on your diagram and discuss its implications.
This will be within the boundary of the PPC and highlights that the nation is producing below its productive capacity, It is likely to reflect idle resources and/or unemployment.
6) Label a point H on the outside of your PPC diagram and provide two examples of changes that could occur in the economy for this point of production to be achieved in the future.
This can occur when there is an increase in the quality of resources (e.g. greater productivity of labour or capital) or the quantity of resources (e.g. greater number of workers or capital equipment).