Answer to Question #314695 in Macroeconomics for Isay

Question

The first principle of economics discussed in Chapter 1 of Mankiws book is that people face trade-offs. Use a production possibilities frontier to illustrate societys trade-off between two goodsa clean environment and the quantity of industrial output. What do you suppose determines the shape and position of the frontier? Show what happens to the frontier if engineers develop a new way of producing electricity that emits fewer pollutants.

Answer 1

Given;

There are two goods in the economy:-

1) a clean environment

2) Quantity of industrial output.

Production possibility curve illustrating society's trade-off between two-"goods":-

society's trade-off between two "goods"

The form of the production possibility curve is determined by the clean environment's opportunity cost in terms of industrial output. The shape of the PPF is governed by how expensive it is to keep a clean environment in terms of industrial output productivity.

If engineers create a new method of producing power that emits less pollutants, it will be less expensive to clean up the environment. This means that the economy will have a cleaner environment at all levels of industrial activity than before. As a result, the introduction of new technology will result in an outward shift in one end of the PPF, while the other end will remain unchanged.