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Define Production Possibility Frontier:

Production possibility curve:

There is a technical tool in Economics to explain the concept of scarcity which is PPC

It is a curve which depicts various combinations of two goods or services which can be produced with all the available resources.

ASSUMPTIONS:

  1. Only TWO set of goods or services is produced.
  2. All the resources are utilized

 

Production possibility frontier:

It can be seen as a curve that is capable of showing a good number of important information to all.

  • Show the different combinations of goods and services that can be produced with a given amount of resources
  • The point on the curve is Pareto Efficient.
  • Any point inside the curve – suggests resources are not being utilized efficiently, but they are FEASIBLE
  • Any point outside the curve – not attainable with the current level of resources, so are UNFEASIBLE
  • Useful to demonstrate economic growth and opportunity cost
  • The definition of efficiency used by economists is named after the Italian economist, Vilfredo Pareto, who formulated it.

He said that an allocation of resources is efficient if it is impossible to change that allocation to make one person better off without making someone else worse off.

  • All combinations which lie on a PPF are, by definition, Pareto efficient.

 

Shifts in the production possibility frontier:

Shifts in PPF takes place when:

  1. Economic Growth takes place.
  2. Change in the Technology thereby increasing the productivity.

A. By improving the productivity of the factors of production, so that the same quantity of factors produces more treatments.

For example, Figure on the right shows surgeons being able to produce either 20 heart bypass or 20 other operations. Increased productivity of surgeons carrying out heart bypasses results in the PPF pivoting outwards, e.g. to 28 heart bypasses or 20 other operations 20.

B. By increasing quantity of the factors of production.

The initial position is again 20 heart bypass or 20 other operations. When more surgeons are allocated to all operations then the PPF shifts outwards, e.g. to 24 heart bypass or 24 other operations as in Figure.

 

The cost of more treatment:

We can equally use PPF analysis to illustrate the trade-off between health care and all other goods.

It is unlikely that society would choose either point an  A or  B, but they and all points between are feasible.

The question is how society decides between them.

 

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