Question no 2:

Some scientists believe that we are rapidly depleting our natural resources. Assume that there are only
two inputs ( labor and natural resources) producing two goods ( concerts and gasoline ) with no
improvement in society’s technology over time. Show what would happen to the PPF overtime as
natural resources are exhausted. How would invention and technological improvement modify your
answer? On the basis of this example, explain why it is said that “ economic growth is a race between
depletion and invention”.
Answer:
As natural resources are exhausted we can expect we will have less concerts and gasoline over time. As
concerts depend much more on labor, the reduction of concerts will be lower than gasoline, which
depends more on natural resources.
This can be seen by the graph below with the new PPF moving to th graph below with the new PPF
moving to the left. With the presence of invention and technological improvement over the time the PPF
curve would.

Tradeoff Along the PPF

Every choice along the PPF involves a tradeoff.

On this PPF, we must give up some labor and natural resourse to get more concerts and gasoline or give
up some labor and natural resourse to get more concert and gasoline.
Using Resources Efficiently:
All the points along the PPF are efficient.

To determine which of the alternative efficient quantities to produce, we compare costs and benefits.

The PPF and Marginal Cost

The PPF determines opportunity cost.

The marginal cost of a good or service is the opportunity cost of producing one more unit of it.

marginal cost of butter.

As we move along the PPF in part a (shown here) the opportunity cost and the marginal cost of labor
increases.
Economic Growth:
The expansion of production possibilities—and increase in the standard of living—is called economic
growth.

Two key factors influence economic growth:

Technological change

Capital accumulation

Technological change is the development of new goods and of better ways of producing goods and
services.

Capital accumulation is the growth of capital resources, which includes human capital.
The Cost of Economic Growth

To use resources in research and development and to produce new capital, we must decrease our
production of consumption goods and services.
We can produce concerts and gasoline or natural resource machines along PPF0.
By using some resources to produce butter making machines, the PPF shifts outward in the future.