Question

Use a production possibilities diagram for cars and other goods to illustrate the opportunity cost of expanding the production of cars

Answer 1

The production possibility frontier shows all the possible combinations of two goods that can be produced with the given level of resources and the technology.

The above given is a production possibility frontier of Cars and Trucks, on the vertical axis Cars are measured and on the horizontla axis Trucks are measured.

Initially the economy was at the point A producing 200 units of Cars and 300 units of Trucks, the the economy moved to point B which contains more of Cars and less of Trucks. At point B , the economy produces 300 units of Cars and 150 units of Trucks. To increase the production of Cars by 100 units they have to frogone the production of Trucks by 150 (300-150) units and this is the opportunity cost of increasing the prodcution of Cars. As we produce more and more units of Cars the opportunity cost will goes on increasing, this is called the law of increasing opportunity costs.