Assumption of PPC Quiz: Production Possibility Curve Flashcards

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Questions and Answers

What does a Production Possibility Curve (PPC) graph represent?

A PPC graph illustrates the maximum possible combinations of two goods that can be produced with given resources and technology.

What are the assumptions behind a typical Production Possibility Curve (PPC) graph?

The assumptions include: choosing between two goods, given resources and technology, full employment of resources, interchangability of resources between goods, no specific resources for one good only, and considering productive efficiency in physical terms.

How does a shift of resources from one good to another affect production according to the PPC assumptions?

Shifting resources from one good to another decreases the production of the first good and increases the production of the second good.

What does full employment of resources imply in the context of a PPC graph?

Full employment of resources means no wastage or underutilization of resources in the economy. Signup and view all the answers

Why is it assumed that no factor of production is specific to one good in a PPC graph?

This assumption is made to allow for the interchangeability of resources between the production of different goods. Signup and view all the answers

Define the central problems of an economy according to the text.

The central problems of an economy are what to produce, how to produce, for whom to produce, problems of growth, choice between public and private goods, and the problem of merit goods production. Signup and view all the answers

How are the production possibilities in a PPC graph determined?

The production possibilities are determined by the maximum output combinations achievable with given resources and technology. Signup and view all the answers

What is capital formation according to the text?

Addition in the stock of capital is referred to as capital formation. Signup and view all the answers

Explain what technique of production refers to in the context of economics.

Technique of production refers to the exact proportion of factor inputs used in the production of goods. Signup and view all the answers

Define merit goods based on the text.

Merit goods are the goods whose consumption benefits both the user and non-users. Signup and view all the answers

Distinguish between private goods and public goods as per the text.

Private goods are available only to selected individuals, while public goods are available to everyone with no exclusions. Signup and view all the answers

Explain the statement 'It will depict reality only if its assumptions are realistic.'

This statement means that economic reasoning can only provide applicable conclusions if the assumptions made are realistic; otherwise, it would have correct reasoning but without practical conclusions. Signup and view all the answers

What is the price elasticity of demand at the midpoint of a linear demand curve?

The price elasticity of demand at the midpoint of a linear demand curve is equal to 1 (unit elastic). Signup and view all the answers

What is the price elasticity of demand where the demand curve touches the X-axis?

The price elasticity of demand is zero where the demand curve touches the X-axis. Signup and view all the answers

What is the price elasticity of demand where the demand curve touches the Y-axis?

The price elasticity of demand is infinite where the demand curve touches the Y-axis. Signup and view all the answers

For any point between A and C on the demand curve, what is the relationship between price elasticity of demand and 1?

For any point between A and C on the demand curve, the price elasticity of demand is greater than 1 ($E_p > 1$). Signup and view all the answers

For any point between B and C on the demand curve, what is the relationship between price elasticity of demand and 1?

For any point between B and C on the demand curve, the price elasticity of demand is less than 1 ($E_p < 1$). Signup and view all the answers

How can we construct a demand curve with unitary price elasticity at all points using the outlay method?

To construct a demand curve with unitary price elasticity at all points, we construct rectangles with equal areas representing the outlay at different price-quantity combinations. The curve joining all such points gives a demand curve with unitary price elasticity. Signup and view all the answers

What is the difference between positive economics and normative economics?

Positive economics describes reality without stating desirability, while normative economics is concerned with what ought to be and suggests ways to achieve societal goals. Signup and view all the answers

Distinguish between microeconomics and macroeconomics.

Microeconomics studies individual economic units and small groups, while macroeconomics covers large collections, aggregates, and macrovariables like national income and employment. Signup and view all the answers

What is the difference between stock variables and flow variables in economics?

A stock variable is measured at a point in time, while a flow variable is measured over a period of time. Signup and view all the answers

Explain the concept of equilibrium in economics.

Equilibrium is reached when the different forces pulling a variable in different directions are in balance, and the value of the variable stops changing. Signup and view all the answers

What is the assumption made in static economic analysis or comparative statics?

The assumption of ceteris paribus (all other things remaining the same) is made in static economic analysis or comparative statics. Signup and view all the answers

How does dynamic economic analysis differ from static economic analysis?

In dynamic economic analysis, the parameters of the economy are allowed to change, while in static analysis, the parameters are taken as given. Signup and view all the answers

What is a demand curve with unitary price elasticity of demand also known as?

A rectangular hyperbola Signup and view all the answers

What are the three categories that commodities are normally divided into, according to the text?

Necessities, comforts, and luxuries Signup and view all the answers

For which category of commodities will the price elasticity of demand be less?

Necessities Signup and view all the answers

Why does the demand for luxuries tend to be less price elastic?

Because they are purchased by people with higher incomes, so the demand does not change much with a change in price. Signup and view all the answers

What type of commodities will tend to have low price elasticity of demand?

Commodities with few and poor substitutes, such as wheat and salt Signup and view all the answers

What is the relationship between the number of substitutes for a commodity and its price elasticity of demand?

The fewer substitutes a commodity has, the lower its price elasticity of demand will be. Signup and view all the answers

Study Notes

Production Possibility Curve (PPC)

A PPC is a graph that illustrates the problem of choice between two goods, say LED (L) and computer monitor (M)
Assumptions of a PPC:
- The country has to choose between alternative combinations of only two goods
- All productive resources of the country are taken as given and so is the state of technology, no changes are made in them
- All productive resources of the economy are fully employed
- The productive resources are suitable for the production of both goods and can be shifted from the production of one to the other
- No factor of production is considered to be specific in the production of one good alone and inappropriate for the production of the other

Economic System

An economy refers to the setup created for meeting the basic and permanent problem of an imbalance between means and wants
The central problems of an economy are:
- What to produce
- How to produce
- For whom to produce
- The problems of growth
- Choice between public and private goods
- The problem of merit goods production

Elasticity of Demand

Price elasticity of demand can be estimated at different points using the same method
At the mid-point of a linear demand curve, price elasticity of demand would be equal to unit
It would be zero where the demand curve touches the X-axis, and infinite where the demand curve touches the Y-axis
On any point between A to C, Ep > 1; on any point between B and C, Ep < 1
Unit price elasticity of demand can be depicted using a rectangular hyperbola demand curve
Determinants of price elasticity of demand:
- Nature of the commodity (necessities, comforts, and luxuries)
- Number of substitutes (commodities with few and poor substitutes tend to have low price elasticity of demand)

Economics

Microeconomics studies the economic activities and responses of individual economic units and their small groups
Macroeconomics covers large collections of economic units, their aggregates and averages, and macrovariables like national income, employment, and so on
Economic variables can be classified into stocks and flows
Stocks are measurable only with reference to a point of time
Flows are measurable only over a period of time
Static economic analysis assumes parameters of the economy are given, while dynamic economic analysis allows parameters to change
Positive economics describes reality without stating the desirability or otherwise of the findings
Normative economics views reality in the light of chosen goals of society and suggests ways and means of achieving them

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Test your knowledge on the Production Possibility Curve (PPC) and its assumptions. Learn about how countries have to choose between different combinations of goods and the conditions under which the PPC is drawn.

Production Possibility Curve Quiz

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