Question

Draw a Production Possibilities Graph for Apple using the following information.

	A	B	C	D	E	F	G
iPhone	0	20	28	35	40	43	45
iPad	56	54	51	45	37	27	0

1. What are the consequences of Apple producing at combination A? What about combination G? Are these combinations productively efficient, allocatively efficient or both? Explain.
2. Plot the combination 43 iPhones and 50 iPads and label it “X.” Plot the combination 30 iPhones and 40 iPads and label it “Y.” Explain what is happening at these points.
3. Explain, with examples, how your graph shows 4 concepts: opportunity costs, efficiency (both types), the law of increasing opportunity costs and economic growth (3-shifters).

Answer 1

Please refer the image attached below for the possibility frontier for Apple and also for part(b) - points X and Y.

A) At point A, the production of iphone is zero and the economy is producing 56 units of Ipads. That means all the limited resources of the given economy is invested in the production of Ipads only. Similarly at point G, the production of Ipads is zero and 45 iphones are being produced. That means the given resources are used in the production of iphones only.

B) Please refer the above image for point- X and Y. At point X, the production of iphone is 43 and that of ipad is 50 units. However point X is unattainable point i.e, it doesn’t fall under or to the potential of an economy because the resources are scarce and every economy has limited resources a available. So point X can be produced in the given economy. Whereas point Y is attainable i.e, it falls under the potential of an economy and the given economy can produce this combination with its limited resources.

C) Opportunity cost refers to the next best alternative forgone by choosing a particular option. So in the above graph it’s quite evident that in order to produce more of a particular good we are sacrificing the production of another good. That sacrifice would be our opportunity cost. The sacrificing ratio would be: Y/X which means in order to increase the production of good X we have to sacrifice the production of good Y.

There are two kinds of efficiency: Productive and Allocative.

Productive efficiency means that an economy can’ produce more of one good without decreasing the production of another good. In the above graph also, after point A, in order to increase the production of iphone the production of ipads were reduced to 54 and so on.

Allocative efficiency means that a combination of both the goods that a society desires the most. It also means that the supply meets the demand of both the goods. For example- if the society desires zero iphones and only ipad then Allocative efficiency point would be A.

The law of increasing opportunity cost refers to an increase in the opportunity cost in order to increase the production of a particular good. Clearly, in the given schedule the opportunity cost is increasing as the production of iphones is increasing.

Economic growth refers to the increase in the production of goods and services in an economy. There can be 3 shifts that can happen in the above PPF. When the production of ipads will be increased and the production of iphone remaining the same as before then there would be an outward shift but only on the y-axis side. Similarly, if the production of iphone increases, production of ipads remaining same then there would be an outward shift but only on the x-axis i.e, iphone side. But if there’s an increase in the production of both the goods (iphone & ipad) then there would be a clear outward or rightward shift from both the sides.