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Production Possibility Frontier

A production possibility frontier (PPF) shows the maximum possible output combinations of two goods or services an economy can achieve when all resources are fully and efficiently employed Opportunity Cost and the PPF Reallocating scarce resources from one product to another involves an opportunity costIf we increase our output of consumer goods (i.e. moving along the PPF from point A to point B) then fewer resources are available to produce capital goodsIf the law of diminishing returns holds true then the opportunity cost of expanding output of X measured in terms of lost units of Y is increasing.  PPF and economic efficiencyWe normally draw a PPF on a diagram as concave to the origin i.e. as we move down the PPF, as more resources are allocated towards Good Y the extra output gets smaller – so more of Good X has to be given up in order to produce Good YThis is an explanation of the law ofdiminishing returns and it occurs because not all factor inputs are equally suited to producing i…

Concept of Liquidity Trap

In this article we will discuss about the concept of liquidity trap, explained with the help of a suitable diagram. Liquidity trap refers to a situation in which an increase in the money supply does not result in a fall in the interest rate but merely in an addition to idle balances: the interest elasticity of demand for money becomes infinite. Under normal conditions an increase in money supply, resulting in excess cash balances, would cause an increase in bond prices, as individuals sought to acquire assets in exchange for money, and a corresponding fall in interest rates.

In such a situation, described by Keynes as liquidity trap, individuals believe that bond prices are too high and will therefore fall, and correspondingly that interest rates are too low and must rise They, therefore, believe that to buy bonds would be to incur a capital loss and as a result they hold only money. This means that an increase in the money supply merely increases idle balances and leaves the interes…

5 Factors that Affect the Economic Growth of a Country

The term economic growth is associated with economic progress and advancement. Economic growth can be defined as an increase in the capacity of an economy to produce goods and services within a specific period of time.

In economics, economic growth refers to a long-term expansion in the productive potential of the economy to satisfy the wants of individuals in the society. Sustained economic growth of a country’ has a positive impact on the national income and level of employment, which further results in higher living standards. Apart from this, it plays a vital role in stimulating government finances by enhancing tax revenues. This enables the government to earn extra income for the further development of an economy. The economic growth of a country can be measured by comparing the level of Gross National Product (GNP) of a year with the GNP of the previous year. The economic growth of a country is possible if strengths and weaknesses of the economy are properly analyzed. Economic …

9 Most Important Properties of Indifference Curves

(1) A higher indifference curves to the right of another represents a higher level of satisfaction and preferable combination of the two goods. In Figure 6, consider the indifference curves I1 and I2 and combination N and A respectively on them. Since A is on a higher indifference curve and to the right of N, the consumer will be having more of both the goods X and Y that is, OX1 + OY1 in relation to OX + OY. Even if the two points on these curves are on the same plane as M and A, the consumer will prefer the latter combination, because he will be having more of good X though the quantity of good Y is the same. (2) In between two indifference curves there can be a number of other indifference curves, one for every point in the space on the diagram. (3) The numbers I1, I2, I3, I4,………… etc. given to indifference curves are absolutely arbitrary. Any numbers can be given to indifference curves. The numbers can be in the ascending order of 1, 2, 4, 6 or 2, 3, 1, 4 etc. Numbers have no imp…


Labour: Meaning and Characteristics | Economics

Labour includes both physical and mental work undertaken for some monetary reward. In this way, workers working in factories, services of doctors, advocates, ministers, officers and teachers are all included in labour. Any physical or mental work which is not undertaken for getting income, but simply to attain pleasure or happiness, is not labour. For example, the work of a gardener in the garden is called labour, because he gets income for it. But if the same work is done by him in his home garden, it will not be called labour, as he is not paid for that work. So, if a mother brings up her children, a teacher teaches his son and a doctor treats his wife, these activities are not considered ‘labour’ in economics. It is so because these are not done to earn income. According to S.E. Thomas, “Labour connotes all human efforts of body or mind which are undertaken in the expectation of reward.” Characteristics of Labour:
Labour has the following peculiarities which are explained as under: