In: Economics
Use a production possibilities diagram for cars and other goods to illustrate the opportunity cost of expanding the production of cars an equal amount from an initially low level and then from a higher level. What happens to the opportunity cost? Define scarcity and relate to the diagram. Define opportunity cost and relate to the diagram. Relate the diagram to the principle of comparative advantage
In the above diagram, PP represents the Production Possibility Frontier of the economy with cars on horizontal axis and other goods on Y Axis. The economy is initially at point A. As we move downwards along the PPF, by increasing the production of cars and reducing the production of other goods, then the slope keeps on increasing because the opportunity cost of increasing car production in terms of number of units of other goods to be given up increases.
This is related to the concept of scarcity because resources in the economy are scarce and wants of the people are unlimited. Thus, limited resources need to be allocated in the best optimum way. Opportunity cost refers to the number of units of other goods to be given up in order to increase the production of cars by 1 unit. This increases because resources used to make other goods are utilized to make cars and as production keeps on increasing, productivity keeps on declining. A country has a comparative advantage in the production of the good in which the opportunity cost of production is lower as compared to another country.