Discuss how the concept of opportunity cost is related to the concept of production possibilities frontier.

Expert Solution

A production possibility frontier of an economy shows the different combinations of two goods that can be produced by using the available resources and technology of production in the economy. The resources of an economy are scarce and fixed. So if one of the goods is required to produce more, then some amount of the production of other good must be sacrificed. Here, the resources are transferred from the production of the good which is sacrificed and are used in the sector where the production is increased.

The following figure shows a PPF for an country.

In the above figure, the curve PPF shows the production possibility frontier of a country. Here the country is producing two goods, X and Y. From the figure, we see that if the country produces at point 'a', it is producing Y1 of good Y and X1 of good X. Now, if the country requires to produce more of good X, then it must reduce the production of good Y. So, we see that when country increases the production of X from X1 to X2, it decreases the production of Y from Y1 to Y2. At this combination of production, the country produces at point 'b' on the PPF.

Opportunity Cost - The oppotunity cost is the cost a person or a business entity bears for sacrificing one alternative and choosing another alternative. It is a loss of potential gain arises from giving up one option and choosing another option. The opportunity cost arises because of the scarcity of resources. It may be even scarcity of money, time, etc.

After discussing the PPF and opportunity cost, we see that the concept of opportunity cost is related to the concept of production possibilities frontier. In case of PPF, we see that because of the scarcity of resources, the production of one good must be sacrificed when the production of another good is required to increase.

In the above figure of PPF, the opportunity cost is as follows;

Opportunity Cost = Amount sacrificed / Amount gained

Or, Opportunity Cost = ( Y1 - Y2) / ( X2 - X1)

Thus, the concept of opportunity cost is related to the concept of production possibilities frontier.

________________________________________________________________

Rahul Sunny answered 6 months ago

What is the relationship between opportunity cost and the slope of the production possibilities frontier. What...

What is the relationship between opportunity cost and the slope of the production possibilities frontier. What does it mean for the PPF to be bowed-in, bowed-out, or linear? What does it mean to be above, on, or below the PPF?

Increasing opportunity cost along a bowed-out production possibilities frontier occurs because?

what important concept is illustrated with the production possibilities frontier? (PPF)

The production possibilities frontier curves show the concepts of scarcity, choice, opportunity cost, efficiency and economic...

The production possibilities frontier curves show the concepts of scarcity, choice, opportunity cost, efficiency and economic growth. Discuss with examples.

production possibilities frontier (PPF) to explain and illustrate the concepts “efficiency”, “trade-off”, “opportunity cost” and “unemployment”.

Explain the relationship between the bowed-out shape of the production possibilities frontier and the increasing opportunity...

Explain the relationship between the bowed-out shape of the production possibilities frontier and the increasing opportunity cost of a good as more of it is produced? (Minimum 150 words) (3 points) What is the difference between quantity demanded and demand? Explain the factors that change the demand. (Minimum 150 words) (5 points)

Explain the concept of opportunity cost and the Law of Diminishing Returns. How are they related?...

Explain the concept of opportunity cost and the Law of Diminishing Returns. How are they related? Why economists use the concept of opportunity cost when they want to determine cost rather than the traditional view of cost, i.e., cost out of pocket? Illustrate with an original and relevant example these concepts and how they are related.

what is the cause of the production possibilities frontier to shift to the right?

Draw a production possibilities frontier for the production of food and clothing. On the graph, identify...

Draw a production possibilities frontier for the production of food and clothing. On the graph, identify (by shading and labelling) the area of feasible outcomes and the area of infeasible outcomes. Now find an efficient point “A” and an inefficient point “B”. Explain why “B” is inefficient

Using a linear production possibilities frontier, demonstrate how we can “price” the production of one product...

Using a linear production possibilities frontier, demonstrate how we can “price” the production of one product in terms of another for a country. Compare the opportunity cost of the product in terms of another product. How can we compare the opportunity cost of production of a good from one country to another? Explain.

Question