Question

They go together

4. Design a production possibility curve. Show and explain how it demonstrates opportunity cost and scarcity. Make this curve reflect the principle of increasing marg inal opportunity costs. In addition to the graph, show the actual numbers you are graphing in a schedule 15 pts 5. Demonstrate on your PPC with a point of operation that the economy is operating below potential. 4 pts

Answer 1

Production possibility curve is drawn between two goods. It is composed of all the different combinations of these two goods that a particular country is able to manufacturer with its all resources employed fully and making the best use of the available technology Opportunity cost is the amount of sacrifice made, the cost of alternative, that is not chosen over the preferred alternative. When a nation produces more than one good, it takes away some resources from its production and reallocate them in others. This is because resources are scarce and cannot be used to increase the production of both the goods. This scarcity of resources forces the nation to experience a trade-off between increasing the production of one good only at the expense of the other. This reallocation involves marginal opportunity cost. As there is a gradual reallocation of nation's scarce productive capacity to an increasing quantity of other good, less and less of the previous good is produced and so its marginal opportunity cost goes on increasing. Now when the nation is producing an inefficient combination, the production point lies inside the PPC. This also implies that the economy is operating below its potential

Guns 20 16 10 In this case suppose that the economy is at A. Moving from A to B brings in a reduction in production of guns by 6 units and an increase in production of butter by 20 units so the opportunity cost of producing 1 gun is 20/6 3.33 units of butter O P Movement from B to C brings in a reduction in production of guns by 3 units and an increase in production of butter by 17 units so the opportunity cost of producing 1 gun is 17/3 5.66 units of butter 60 80 97 100 Butter Note that as production of butter increases, marginal opportunity cost also increaseas.