Question

Explain the connection between opportunity cost and the PPF?

Answer 1

ANSWER - Production possibility curve is a graphical representation which shows all the different combination combination of two goods that can be produced from a given resources, while Opportunity cost is the second best alternative which can be obtained from the given resources by giving up some other things. According to Production Possibility Curve Opportunity cost is the second best alternative combination wich an be obtained fromthe given resources by giving up the current combination of two goods.

The opportunity cost of producing the second best alternative combination is only the second combination of two goods in the production possibility curve. PPC captures the opportunity cost which is faced by the production possibility of two goods. The opportunity cost of moving from one efficient combination combination to another is nothing but how much one good in given up to obtain one more of the other good. The point of the production possibility curve is how much production on one good is sacrificed for producing more quantity of the other good. Thus the opportunity cost is directly connected to the shape of the production possibility curve.

DIAGRAM.

EXPLAINATION

In the above diagram, the points A, B, C, D, E and F are the different combinations of two goods(Good X and Good Y). Here, the opportunity cost of producing combination in point A is to produce combination in point B, thus when it moves from point A to point B one unit of Good Y has to be sacrificed to obtain one extra unit of Good x. Thus, the opportunity cost of producing combination A is to produce combination B and as more and more units of production of Good X is increased it moves from one point to another.