Concept of opportunity cost to economy
2 answers:
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Answer:
Refer explanation.
Explanation:
A production possibility frontier is a graph that shows all the different combinations of output of two goods that can be produced by a specific country using limited resources and technology. It elaborates on the concept of trade-off, choice and scarcity.
a. Please refer Diagram attached.
b. Point X marked on the diagram is feasible because it is on the line. Any point on the line or inside is feasible since the country has the resources and technology to produce it. It is also efficient since any point on the PPF curve means that maximum output of a particular product is being produced using scare resources.
c. Opportunity cost is the benefit lost from the second best alternative. At point C, 2 cakes are being produced and 7 cookies are being produced. When an additional cake is produced (i.e. 3), the number of cookies produced is 3. Hence, the opportunity cost of producing an additional cake is 3 cookies (7-4).
d. At point E, no cookies can be produced but 4 cakes are being produced. When production moves to C, 2 cakes and 7 cookies are being produced. Thus, opportunity cost from point E to C is the loss of two cakes.
e. The law of diminishing returns is defined as that when additional increments of resources are added to a particular purpose, the marginal benefit gained from that purpose will decline. In the current case, at point E, when 4 cakes are being produced, 0 cookies can be produced. However, when one cake is sacrificed and those resources go into cookie production, 4 cookies can be produced (point D). This diversion of resources, causes a little loss to cake production but a larger gain to cookie production.
However, at the other end, at point B, when almost all resources are devoted to cookies, 1 cake is produced and 9 cookies. Devoting further to cookies would lead to only an additional of one cookie being produced, but also a loss of 1 cake, leading to no cakes to be able to be produced. The gains to cookie production from adding these last few resources are very little but the loss of cake production is large (100%). This shows the law of diminishing returns. It is important for economies to understand where production would have large gains and optimum amounts of both products can be produced.
