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 (8 marks)?
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The production possibility curves is a hypothetical representation of the amount of two different goods that can be obtained by shifting resources from the production of one, to the production of the other. This essay will take into account the two factors, the depletion of the natural resource and the improvement in technology and further analyse what effect they will have on a country’s production possibility curve.
Initially, the exhaustion of an important natural resource, such as oil or natural gas will deplete supplies of the resource already available. Therefore, exhaustion should further lead to a reduction in the supply and production of goods and services, otherwise known as output. As a result, this should move the production possibility curve inwards as the country’s capabilities to produce goods has dramatically decreased due to the exhaustion of this vital natural resource. This is perfectly illustrated in the diagram below:
Secondly, improved technology gives greater efficiency and increases productivity, whilst also possibly reducing the impact on the depleted resource. An increase in overall productivity as improved technology allows more goods to be produced in a more efficient time span whilst also reducing the need for more workers as machines are proven to be much more dependent and efficient in producing goods. As a result, there is less opportunity cost in the country’s production possibility curve and an increase in the country’s capability to produce more goods and services. This is clearly shown below as the production possibility curve moves outwards, indicating an increase in productivity and efficiency.
Conclusively, the overall effect on the country’s production possibility curve is shown through the illustrations of both diagrams. It will further depend on their relative strengths but results from the change in available resources and their effect on production possibilities.