Question

1）How do the concepts of opportunity costs and marginal thinking, affect the way we make choices. Give examples.

2）(a) Explain what can we learn from a country's production possibilities curve (ppf)? (b) What can cause the ppf to shift inward or outward?

Answer 1

Ans 1. Opportunity Costs is the cost of foregoing second-best alternative. Whereas, marginal thinking refers to evaluating the benefit and costs of one more unit of something that a decision-maker needs to decide upon.

For example, if you are choosing to use your time to study instead of going to the park, then the opportunity cost would be the relaxing and enjoyable time you would have had if instead you had gone to the park.

Or the Government decides to spend on the public programs then the opportunity costs would be the repayment of the interest of the national debt that they have foregone.

As for marginal thinking, for example, You choose to study physics one more hour because utlising your time for this would improve your score and do well in the coming exam. So you will not consider it as waste of time as the benefits received will be greater.

Just like this, our decisions can be affected by our rational thinking and evaluation. Benefits and profits is what we always go after and they significantly affect our decision-making.

Ans 2.

A) Production Possibility Curve is a graph that shows different combination of two goods that can be produced by the existing resources.

If we are taking a country's PPC into account, then we can analysis the output potential of that country and what type of capital and consumer goods that country is capable of producing.

This is most simplified depiction of the country's economy. How well are they producing those goods or how much more time it will take them to reach their highest potential can be evaluated through the curve of the PPC graph.

1 3 Goods 2 ->x B Services

It can be like that above graph or we can also use the capital and consumer goods of the country instead of goods and services on the PPC.

B) The PPC curve can shift inward or outward when there is a change in the country's resources or technology.

For example, Country A found a new cutting-edge technology for one of their capital goods in which they have expertise in, then their potential will rise and the curve will shift outward.

It is to be noted that, the shift can happen both ways or on just one side whereas, the other will remain constant.