Question

What are the four supply factors of economic growth? What is the demand factor? What is the efficiency factor? Illustrate these factors in terms of the production possibilities curve.

Short answer

Four supply factors of economic growth

1. Improvements in the quality or quantity (or both) of natural resources.
2. Improvements in the quality or quantity (or both) of human resources.
3. Increase in the supply (stock) of capital goods.
4. Improvements in technology

The demand factor refers to the willingness of households, businesses, and the government to purchase goods and services supplied by the economy.

The efficiency factor refers to an economy’s potential to utilize its scarce resources such that the satisfaction and utility derived from it are maximum. It affects the quality.

The PPC is shared below:

Step-by-step solution

Step 1. Supply factors of economic growth.

1. Quality and quantity of natural resources: If the quality of natural resources increases, the production process will become more efficient. If the quantity of it increases, more inputs will be available for production. Any increase in one of them or both will raise the volume of goods and services produced. It will increase the output level of the economy, which will promote economic growth.
2. Quantity and quality of human resources: An increase in the amount of human resources will increase the annual average hours of work (labor inputs). An increase in the quality of human resources increases the average output produced per hour (labor productivity). Since real GDP is the product of labor inputs and labor productivity, an increase in both will increase the real GDP. Thus, an increase in both will promote economic growth.
3. Supply (stock) capital goods: An increase in the stock of capital goods will increase the labor productivity of the workers. This will increase the real GDP of the economy. Hence, an increase in the supply of capital goods will enhance economic growth.
4. Technological advancement: An improvement in technological advancement helps firms increase the quantity of goods and services they produce. The size of the real GDP of the economy will increase, which shows the promotion of economic growth. Thus, an improvement in technology increases economic growth.

Step 2. Meaning of demand factor.

The willingness of the households and the government to purchase the supplied goods and services in the economy is demand. When the supply factors improve the economy’s production capacity, the demand factor is required to absorb the increased output by the households, businesses, and government.

The demand factor is also required to work along with supply factors to promote economic growth.

Step 3. Meaning of efficiency factor.

The efficiency factor refers to the economy’s potential of utilizing its resources and production capacity such that the utility derived for its maximum. It deals with the quality of production potential. If the economy focuses only on the production possibility and utilization of resources, it will not attain its maximum potential.

In order to attain the maximum potential, an efficiency factor is required, which increases economic growth.

Step 4. Diagram of production possibility curve

The concept of the production possibility curve explains that an economy is running at its full potential if the real GDP lies on the curve. If the real GDP is behind the curve, then it is working at its full potential. If the real GDP is outside the curve, it is beyond the reach; hence, it is not possible.

The following diagram shows the production possibility curve of an economy and the changes in real GDP because of different factors.

The AB curve represents the production possibility curve at an initial period. The real GDP lies at point ‘a’ on the AB curve (at full potential).

Any increase in the supply factors will move the production possibility curve outward. The production possibility curve has shifted from AB to CD, as shown in the diagram.

Now, it is the responsibility of the demand factor to increase the total spending on goods and services produced such that the real GDP (point a) moves to a higher point. Thus, the demand factor is required for economic growth.

The efficiency factor will determine the extent to which the real GDP (point a) will shift outward. If it shifts on point b, which lies on the curve CD, the economy is running to its full potential. It shows that the economy is fully efficient. But if the real GDP moves from point a to point c, it shows that economy is not running to its full potential. The economy is not fully efficient at point c. The efficiency factor is required to push the economy to its full potential.