1) Explain the three functions

1) Explain the three functions that an economic system mustperform and how a market economy

performs them.

2) What are the reasons that the PPF(Production PossibilitiesFrontier) is shaped the way it is?

3) What are the differences between comparative advantage andabsolute advantage?


1. The three main functions that an economic system must performare- Production, allocation and distribution

Production of goods that the society wants for consumptionshould be produced. These goods should then be allocated todifferent people for further development of the product. When theproduct is fully made, it should be distributed for its finalconsumption to wholesalers or shopkeeper who then sell it to theultimate consumers. Once these products are distributed they willalso have to be regenerated for future use. So the process ofregeneration begins from here.

2. the shape of the production possibility curve that is concaveto the origin is because of the increasing opportunity cost.Opportunity cost is the amount of a commodity that a nation has tosacrifice in order to produce an extra unit of the other good.There are increasing opportunity cost because resources are notequally efficient in the production of the two goods we take.Therefore we transfer more and more resources from the productionof one good to the other and sacrifice more of one of thegoods.

3. Absolute advantage is when a nation can produce more good ata faster rate than the other nation. Comparative advantage is basedon the opportunity cost that a nation losses by choosing to produceone good than the other. If the opportunity cost to produce a goodis lower in a nation, then it has a comparative advantage.

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