Lastly, economies that prefer production of capital goods over consumer goods peform

better in
the long run as it implies greater availability of resources in future. Capital goods
production over
and above the rate of capital consumption shifts the PPC outwards and indicates growth
in the
economy.

12. MIJ 09/P21/Q2/a

An economy can produce agricultural and industrial goods. Explain the possible effects
on its
production possibility curve if there is an increase in the productivity of its agricultural
workers.

SUGGESTED ANSWER:

A production possibility curve (PPC) shows combinations of two or more goods and
services that can be produced using all available factor resources efficiently with the
given state of technological knowledge. Economies typically have concave production
possibility curves as producing more of one good requires giving up ever increasing
amounts of the other. An economy experiencing a
tradeoff between industrial and agricultural goods employs resources that are less and
less suited to
agricultural production if it wishes to increase the supply of agricultural commodities.
This increasing
oDDortunity cost in terms of resources that are better suited to industrial produce is
captured by the
Concavity of the PPC.
As stated earlier, a PPC is drawn assuming given resources and technology and thus,
any change in
either causes a shift in the PPC. TechnologIcal improvements, increases in resource
endowment and improved efficiency in employing factors of production all cause an
outward sh.ft in the PPC.
M/hether the shift increases the production of one. or both goods however, depends on
the nature of
hande. Sometimes, labour may be well suited to the production of one good or category
of goods and not the other. In that case, the shift in PPC alters the production
possibilities of only one commodity while that of the other remain unchanged
An increase in the productivity of agricultural workers implies that the same number of
workers
produces a higher output level or lesser workers are required to achieve the same
production target.
Such an increase however, has little or no bearing on the production of industrial goods.
Thus, the
resulting PPC is pivoted in favor of agricultural commodities. However, industrial
production may
also increase if agricultural commodities feed large industries that process them and/or
manufacture
value added items by using them as raw materials. Lastly, it is assumed that all other
factors are kept
constant. Increase in productivity of agricultural workers increases agricultural produce
ceteris
paribus i.e. provided there are no external shocks like natural resource depletion that
may offset this
increase in output.

13. O/N 07/P02/Q4/a

Explain, with examples, why labour productivity might vary between countries.

SUGGESTED ANSWER:
Labour productivity is the relationship between physical output and the amount of labour
employed
in producing it. It is usually expressed as output per man hour. An increase in labour
productivity
implies that either the same output can be produced at a lower labour cost or more
output can be
produced using the same amount of labour.
Labour is not a uniform resource and hence, neither is labour productivity. Productivity
differences
may stem from a variety of reasons such as the level of education, skills, training,
research and
innovation and other resource endowments in economies. Consider a developing
economy like
Pakistan where illiteracy is high and the average skill level among labourers is low.
Pakistan may not
be able to justify heavy investments in sophisticated machinery and fail to bring about
productivity
improvements with a low skilled workforce lacking technical know-how. Poor working
conditions
and worn out tools and equipment also reduce workers' productivity. On the other hand,
when a
skilled workforce such as that of Japan's is equipped with capital, output increases
manifold and so
does labour productivity.
Overall health conditions and motivation levels also have a bearing on labour
productivity. A
developing economy's labourer on average may be under nourished or diseased
compared to a
developed economy's worker. In addition, he earns a meagre wage which is highly
insufficient to
meet his tamily needs. Lacking the physical and mental ability to work and earna fair
reward for his
sweat, a labourer is bound to lack motivation to fully exploit his potential. Performing
below it
dampens labour productivity as many more workers are required to meet the same
output target.
On the other hand, developed economies can attract high foreign investments despite
high wages as
high productivity compensates for higher wages and reduces unit labour cost.

15. MIJ 04/P02/Q2/a

An economy is faced by the exhaustion of an important natural resource at a time when
it is
introducing improved technology.
Explain how these events will affect the economy's production possibility curve.
SUGGESTED ANSWER:
A production possibility curve (PPC) shows combinations of two or more goods and
services that can
be produced using all available factor resources efficiently, with the given state of
technological
knowledge. Consider the example of a firm which has 10 labour hours available to
produce two
products, X and Y. One unit of product X requires two labour hours and one labour hour
helps
produce
characterized by the linear equation Y = 10 -2 X, as shown in the figure. The negative
slope of the
PPC implies a tradeoff between the production of commodity X and Y because of the
basic economic
problem of scarcity.

AS stated earlier, a PPC is drawn assuming given resources and technology and thus,
any change
either causes a shift in the PPC. An economy experiencing technological improvements
faces
nghtward shift in its production possibility curve, implying that more of good X or Y or
both can ha
produced (diagram 1). If technology is better suited to the production of one commodity,
say X than
Y, then production possibilities are altered for that commodity only (diagram 2).

ein
Diagram 2
Diagram 1

Increase in the stock of resources or the efficiency with which factors of production are
employed
also causes a rightward (outward) shift in the PPC. Any decrease in resources however,
reduces the
production possibilities of commodities and causes the PPC to shift inward. Any
economy
experiencing the exhaustion of an important natural resource suffers a leftward shift in
its frontier,
implying that less of good X or Y or both will be produced
If however, an economy experiences both technological improvements and natural
resource
depletion at the same time, it is difficult to conclude the net impact on its production
possibilitues
The two effects may cancel out or one may overrule the other, leaving the overall
impact uncertaln
It depends on the importance of the natural resource, availability of its substitutes, the
magnitude o
technological change and other relevant factors.

16: O/N 02/P02/Q2/a

Explain the link between the basic economic problem of scarcity and opportunity cost.

SUGGESTED ANSWER:
The basic economic problem of scarcity iS characterized by limited means and
unlimited wants and
conctraints all individuals, firms, countries and regions. A student giving up a movie with
friends at
the cinema for the sake of studying at home forgoes the enjoyment as she does not
afford time for
both. Likewise, a household going on a vacation may not afford to buy a luxury car the
same vear a
it does not have enough finances to meet both desires.
Scarcity, the limiting factor, therefore brings thousands of trade-offs our way and
necessitates
economizing on the use of our resources. Among all the competing uses, an individual,
household.
firm or an economy has to choose the most important objective it wishes to put it
resources to work
at. This choice, in terms of the next best alternative forgone is temed opportunity cost.
Opportunity cost is the real cost measured in terms of goods and services which must
be given up in
order to obtain something else. The opportunity cost for a teacher conducting extra
tutorials in the
evening is the leisure time he may have had with family and kids at home. The
opportunity cost to a
student attending the tutorial likewise, is the time he/she can allocate to self-study.
The link between scarcity and opportunity cost can be emphasized through graphical
representation
ie. in a production possibility curve (PPC). A PPC shows combinations of two or more
goods and
services that can be produced using all available factor resources efficiently, with the
given state of
technological knowledge. Consider an economy allocating resources between
consumer goods and
military goods.
Consumer Goods4
10
6-
4
2-
Military Goo ds
4
5
3
The negative slope of the PPC confirms scarcity and a trade-off between the two
categories of
goods. Consumer goods can only be increased if resources are diverted from the
productionof
military goods- hence, an economy cannot have more of both. It must choose between
the two and
incur an opportunity cost. Employing resources to produce 6 units of consumer goods
necessitates
forgoing (5-2) 3 units of military ones.
It must be noted that scarcity may be reduced through more efficient allocatiön of
resources or
technological change but it may never be eliminated. This also implies that human
beings will face
trade-offs and continue to make choices, incurring opportunity costs for as long as they
live as
scarcity may never cease to exist.
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