Question

The specific-factors model is often referred to as the short-run model. Why is this the case and how does it relate to the marginal product of labor (MPL) in each sector and the production possibilities frontier (PPF)?

Answer 1

A short run model is one in which particular means of production such as land, are fixed and cannot be moved between sectors or businesses. There is unrestricted labour movement amongst these different sectors, therefore each market's marginal product of labour is identical. As a result, an economy's overall workforce level is optimal.

Because greater and greater labour inputs are introduced, there are decreasing returns to scale, as well as the marginal product of labour continues to fall. As a result, the PPF curve is indeed concave and slants downward. To achieve full employment, the country can export or import at any time. The United States, for example, both produces and imports oil.