Question

In: Economics

(a) Opportunity cost in economics is highly relevant and significantly affect households, firms and the government....

(a) Opportunity cost in economics is highly relevant and significantly affect households, firms and the government. Explain by means of an example.

(b) Illustrate scarcity and trade-off by means of a production possibilities frontier (PPF).

  

Solutions

Expert Solution

(a) it can be mentioned that opportunity cost in Economics as a significant effect on the households and firms. Considering, an example where the government decides to increase the tax rate as a result of which the revenue increases but on the downside the opportunity cost of the sacrifice is the increase in the consumption by the consumers due to the tax increase as a result of which at times they can be chances that ultimately there will be net loss then the net profit revenue expected to increase and this can be significantly hamper the domestic industries due to the increase in the prices as a result of which problems such as unemployment can prevail which is also an opportunity cost. That is the reason why you have to understand that opportunity cost has a major role in building the economy.

2) Consider a regular PPF, scarcity can be explained by the choices and because the resources case to produce, if you have to produce more of one good then you have to sacrifice another good and this there is a movement along the production possibility Frontier and it is not possible to increase the production of one good by keeping the other good constant because resources are scarce and ultimately you have to devote it to one good and sacrifice for another. Tradeoff can also be explained here by understanding that in order to produce more of one good in a PPF, you have to sacrifice another good and this is the trade off here


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