Question

Principle 1:Verbally and graphically describe the Opportunity Cost of producing MORE of some product. Principle 1 verbally stated: If MORE of some product X is produced, then the Opportunity Cost of producing more one product X is the Quantity of another product Y that cannot be produced by the resources used to produce MORE of product X. Now, Draw a Production Possibilities curve to graphically illustrate the Opportunity cost of producing more of a product (already drawn, but you have to show how Opportunity Cost is illustrated on the curve

  

> Please can someone help with all the red. I'm totally lost on how to draw these graphs.

Answer 1

1. Opportunity cost is the next best alternative sacrificed and PPC is the graphical representation of the maximum output of two products and their combinations which can be produced using existing resources and technology. In figure 1, when the economy moves from point A to point along the PPC, output of Good X increases by op amount. However, this increase in the production of Good X comes from the reallocation of resources from Good Y to Good X, and at the cost of sacrificing nm amount of Good Y. This sacrifice of nm amount of Good Y to produce op extra amount of Good X is opportunity cost.

Goodyn PPC Good Fig1: Production Possibility Cuore

2. In Figure 2, MN and OP are the production possibility curves of countries M and O respectively. With the same amount of resources given, M can produce larger quantities of both the goods than the country O. It means country M has absolute cost advantage over O in respect of both the goods. Incorporating curve OQ1 parallel to MN, OQ1 can represent the PPC of country M. If country M gives up production of Good Y, it can produce Good X at Q1 level which is grater than P level of output of Good X. This implies that country M has a comparative cost advantage in the production of Good X.

Now if country O gives up the production of Good X, it can produce Good Y at the level O which is greater than P level output of Good X. Thus country O has less comparative disadvantage in the production of Good Y. Accordingly, country M will specialize in the production and export of Good X, while country O will specialize in the production and export of Good Y.

ne Good Y P Q Nx Good x Fig 2: 9llustration of compagitive advantage using PPC.

3. In figure 3, DD is the downward sloping market demand curve showing the law of demand. If price of Good X increases from 30 to 40, quantity demanded of Good x decreases from 20 units to 10 units. If price decreases from 30 to 20, quantity demanded increases from 20 units to 30 unite. As per law of demand, cetris peribus, price and quantity demand of any good and service are inversely related to each other

3. y To Priceto ↑ DA Good X201 H B Quantity demanded for Good X fig 3: Market demand curve

4.  In figure 4, SS is the upward sloping market supply curve showing the law of supply. If price of Good X increases from 30 to 40, quantity supplied of Good X increases from 40 units to 50 units. If price decreases from 30 to 20, quantity supplied decreases from 40 units to 30 unite. As per law of supply, cetris peribus, price and quantity demand of any good and service are directly related to each other

Price L Good X 30 v E -> 30 40 50 x Quantity Supplied for Good y Fig 4: Market Supply for Good X

5. DD is market demand curve and SS is the market supply curve for Good X. DD shows the quantity of Good X demanded at different levels of price while SS shows the quantity of Good X supplied at different levels of price. At price P, both quantity demanded as well as quantity supplied are equal. At P, DD and SS intersect to form the market equilibrium E where equilibrium price is P and equilibrium quantity is Q.

Price of Good x Pf X P fig 5: Quantity of Good X Market Equilibrium

6. There are two types of dis-equilibriums for a good - above equilibrium price disequilibrium where quantity demanded is less than quantity supplied(surplus market) and below equilibrium price disequilibrium where quantity demanded is greater than quantity aupplied(shortage).

Surplus is at Price P1 where Q2Q1 is surplus.

Shortage is at Price P2 where Q3Q4 is shortage.

o surplus ,s Price of - P--t-X Good x Shortage o x 22Q3 Q Q Quantity of Q4 Good x fią 6: Market Disequilibrium