BLOG CHALLENGE

 

The choice between investing in capital goods and producing consumer goods now does affects the ability of an economy to produce in the future.

-What is a PPC ?
The PPC is a curve showing the various combinations of the maximum quantity of 2 outputs that an economy can produce within a specific period of time with all its resources fully and efficiently employed, assuming a particular state if technology.

-What is Capital and Consumer goods ?
Capital goods are man-made aids to production and use to produce consumption goods in the future but not for immediate, final consumption. Examples would be machinery and equipment. Consumer goods on the other hand are bought for final consumption, usually but individual households. Examples would be food and hand phones.

Since we want the economy to be fully utilising its resources efficiently, let's compare point B and point C( on the frontier) in this case:

Point C: If the country decides to produce more capital goods than consumer goods right now, it implies a higher standard of living in the future as compared to point B as there will be more capital goods to produce more consumer goods for the people to consume in the future. However, in the short run, the individual's standard of living will decrease as there are fewer quantity of consumer goods in the market. Opportunity cost has been incurred in this case as to produce more capital goods, there must be a decrease in the production of consumer goods where this is the sacrifice that has to be made.

Point B: If the country decides to produce more consumer goods than capital goods right now, it implies the individual's standard of living increases in the short run as compared to point C as there will be more consumer goods in the market. However, in the long run, the individual's standard of living will decrease as there are lesser capital goods (Reason for the decrease in capital goods: Capital goods will depreciated due to wear and tear and needs replacement) to produce more consumer goods for the people to consume in the future. Opportunity cost has been incurred in this case as to produce more consumer goods, there must be a decrease in the production of capital goods
where this is the sacrifice that has to be made.

The economy can choose to produce at point I but it implies the economy is under-producing and not using the resources efficiently. The economy cannot produce at point Z as it is an unattainable output where it implies scarcity of resources. Therefore, we shall not consider these two points as we want the economy to be fully utilising these resources efficiently.

When the country produces more capital goods right now as compared to consumer goods, in the long run the Production Possibility Curve might shift out. (As shown below)


The reason is due to an increase in capital goods where there is an increase in quantity and quality of resources where more capital goods can produce more consumer goods for the people to consume.

However, on the other hand, when the country produces more consumer goods right now as compared to capital goods, in the long run the Production Possibility Curve might shift inwards.(As shown below)



The reason is due to not producing more capital goods to replace those capital goods that depreciates, resulting in lesser capital goods to produce more consumer goods, resulting in the overall resources to decrease, thereby causing the PPC to shift inwards.

Therefore, it is the government's responsibility to decide which combination is the best combination for the country as it will affect the whole PPC to change not only in the short run but in the long run as well.

An example of an economy that wants to focus on producing more consumer goods right now as compared to capital goods is Haiti as they are one of the poorest countries in world and they are experiencing poverty, the economy should focus more on producing consumer goods like food to ensure at least the people are not starving in their country. However, the government must be careful on the combination that they choose to produce at as it might affect the people in the country in the long run. They should also produce an amount of capital goods to ensure that there are enough capital goods to recover those capital goods that depreciates so that in the near future there are capital goods to produce consumer goods for its people.