In other words, given our current stock of resources, the marginal cost of producing additional quantities of either good will increase. Equally, if we choose to produce more tractors, the opportunity cost in terms of wheat will increase. Thus as we move from point E to F we have to sacrifice YZ tractors to gain TV tons of wheat. The increased opportunity cost arises because we have to start transferring resources that are more productive in manufacturing, and less productive in agriculture.įig1 shows that as we continue to produce more wheat, the opportunity cost gets bigger still. We can see from Fig 1 that w have gained the same additional amount of wheat as before (RS = OR), but it has come at an increased opportunity cost, as this time we have had to sacrifice XY tractors. Now suppose that we decide to increase wheat production again, moving to point D on the PPF. We make only a small sacrifice in tractor production because we can move resources such as workers with little manufacturing skills into agriculture, where they may have more suitable skills. So we can say that AW tractors is the opportunity cost of producing OR tons of wheat. If we move to point C, we would sacrifice AW tractors in order to gain OR tons of wheat. To explain this, suppose the economy is initially at point A, so that only tractors are being produced. This is because factors of production are not equally productive in all uses. Note also that the PPF is a curved line, bending out (concave) from the origin. There are competing uses of resources, so they are scarce. It therefore follows that, given our current limited stock of resources, to increase the production of one good means sacrificing some production of the other good. But this point lies outside of the PPF, indicating that more resources (factors of production) are required. At this point the economy would be producing more of both wheat and tractors, compared to point F. The PPF illustrates how resources are scarce. The curved line AB shows all the possible combinations of output of wheat and tractors that could be produced, provided that all resources are employed.įor instance, at point C it could produce OW tractors and OR tons of wheat: If all resources were devoted to wheat production, it could produce OB tons, and zero tractors. In the diagram (Fig 1) below, if country x devoted all its resources to tractor production it could produce OA tractors in a year, and zero tons of wheat. The country has a given quantity of factors of production which it can allocate to the production of either good. The economy of country X can produce two goods only (let’s call them wheat and tractors). We can represent the concepts of scarcity, choice and opportunity cost in a simple two dimensional diagram called a production possibility frontier ( PPF) diagram. Production Possibility Frontiers Production Possibility Frontiers Conflicts and Trade-Offs Between Objectives and Policies.Equilibrium Levels of Real National Output.The Benefits and Costs of Economic Growth.The Characteristics of Aggregate Demand.The UK Economy - Performance and Policies.Positive and Normative Economic Statements.Alternative Views of Consumer Behaviour.Free Market Economies, Mixed Economy and Command Economy.Price, Income & Cross Elasticities of Demand. Specialisation and the Division of Labour.Introduction to Markets and Market Failure.Wage Determination in Competitive and Non-competitive Markets.Business Behaviour and the Labour Market.Factors Influencing Growth and Development.Macroeconomic Policies in a Global Context.Trading Blocs and the World Trade Organisation (WTO).Strategies Influencing Growth and Development.
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