(2023) A Level H2 Econs Essay Q1 Suggested Answer by Mr Eugene Toh (A Level Economics Tutor)
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a.
Introduction
A production possibility curve (PPC) shows the maximum amount of two different goods that can be produced in an economy, using all available resources and technology efficiently. The curve illustrates the trade-offs and choices an economy faces due to limited resources. Opportunity cost is defined as the next best alternative forgotten, and is the value of what you give up when you choose one option over another.
How the PPC shows underutilisation of economic resources
The PPC represents the maximum potential output of an economy when all resources are fully and efficiently utilized. It shows the various combinations of two goods or services that can be produced at this level of efficiency.
Any point inside the PPC indicates underutilization of resources. This is because, at these points, the economy is producing less of both goods than it could if all resources were fully employed. For example, if an economy is operating at a point inside the curve (represented by X), it indicates that there are idle resources, such as unemployed labor, underused capital, or untapped natural resources.
The PPC can also demonstrate underutilization through shifts. If an economy improves its use of resources, moving from a point inside the curve towards a point on the curve, it shows a reduction in underutilization. Conversely, if the economy was at a point on the curve and moves inward due to a recession or inefficient resource use, it shows increased underutilization.
How the PPC shows opportunity cost
The PPC is a graph that shows the maximum number of two different products (like cars and computers) that an economy can produce with its limited resources.
Suppose on our PPC, at one point, an economy can produce 5 cars and 10 computers. If it wants to produce one more car, moving to a different point on the curve, it might have to reduce its computer production to 8. This means the opportunity cost of producing one extra car is giving up the production of 2 computers.
Opportunity cost is about what you have to give up to get something else. In our example, producing one more car costs 2 computers. This is the opportunity cost of increasing car production.
The slope of the PPC at any point shows the opportunity cost. In our example, the slope of the curve when moving from 5 cars to 6 cars tells us that the economy has to give up 2 computers to make that additional car.
b.
Introduction
The aspiration to increase the total production of goods and services, or economic growth, in an economy without causing environmental damage or other unintended consequences, essentially encapsulates the idea of sustainable economic growth. Sustainable economic growth aims to balance the expansion of economic activities without unintended consequences such as environmental preservation and increased debt. It confronts the challenge of ensuring that current development does not impair the ability of future generations to meet their needs.
How increasing total production of goods and services results in environmental damage and unintended consequences
Economic growth is often spurred by increases in key components of aggregate demand (AD), such as consumption and investment. When consumers spend more, and businesses invest more in capital goods, there is an increase in AD. This results in a multiplied increase in real national income through the multiplier effect. The multiplier effect amplifies the initial increase in spending, leading to a more significant expansion in economic activity and output. As a result, there is a rise in economic growth, often reflected in a higher Gross Domestic Product (GDP).
However, this increase in economic activity, while beneficial for growth, frequently leads to environmental challenges. The uptick in investment and consumption, driving the AD upwards, often involves intensified industrial activities, construction projects, and energy consumption that predominantly rely on fossil fuels. Such reliance results in significant carbon emissions, exacerbating climate change. Moreover, the expansion in industrial and urban development contributes to land pollution and disrupts natural ecosystems. The increased output and construction activities consume vast resources, leading to habitat destruction and further environmental degradation. This pattern of growth, rooted in resource-intensive and polluting practices, underlines the unsustainability of conventional economic expansion.
Sustainable Economic Growth through Strategic Investments
The goal of increasing the production of goods and services in an economy without causing environmental damage can be achieved by the government strategically directing investments towards green technology and sustainable capital goods. These investments not only stimulate economic growth but also ensure sustainability.
Firstly, increasing investment in green technology can lead to a rise in aggregate demand (AD). When the government and private sectors (through subsidies/incentives for firms to do so) invest in sustainable technologies, such as renewable energy sources or energy-efficient systems, investments will increase. Since AD = C+I+G+(X-M), this increase in AD can lead to a multiplied effect on real national income, as per the multiplier effect. This thus increases economic growth (and the total amount of goods and services produced increases)
Secondly, spending on sustainable capital goods, like renewable energy infrastructure, contributes to an increase in the Long Run Aggregate Supply (LRAS). This investment enhances the economy's productive capacity, leading to potential growth. By investing in renewable energy and other sustainable technologies, an economy can shift from reliance on finite and polluting resources to more sustainable and environmentally friendly alternatives. This shift not only ensures the efficient use of resources but also positions the economy for steady growth in the long run.
Investing in the 'right areas', such as green technology and sustainable capital goods, plays a crucial role in reducing carbon emissions and environmental degradation. By prioritizing spending in sectors that have a lower environmental impact, an economy can decouple economic growth from environmental harm. Renewable energy sources, for example, significantly reduce the reliance on fossil fuels, which are major contributors to carbon emissions and climate change.
Collectively, these strategies - increasing AD through green technology investments and enhancing LRAS with sustainable capital goods - pave the way for sustainable economic growth. This approach allows an economy to grow and expand its production capacity and ensuring that growth is not only economically beneficial but also sustainable in the long term.
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