Refer to the graph below Which points would be preferred to

Refer to the graph below. Which point(s) would be preferred to point F. Explain. Which point(s) are productively efficient. Explain. Explain how the economic concepts of scarcity and resources is demonstrated in this model? Explain how the economic concept of opportunity cost is demonstrated in this model? Give an example.

Solution

The production possibility frontier (PPF) is a curve giving all such combinations of goods that can be produced using all the available resources efficiently. All points beyond a PPF cannot be achieved by a country given the present state of technology and resources. All points inside the PPF represents inefficient use of resources.

a. The point F lies inside the PPF. Hence it represents the inefficient use of resources. Any point on the PPF will be preffered to the point F.

b. The points on PPF represents efficient use of resources. Hence any point viz A, B, C, D, or E represents productive efficiency.

c. The PPF represents scarcity by the negative slope. As resources are scarce, the problem is to allocate these resources in such a way that the society can produce its optimum without any waste. As resources scare, putting it to produce one good will decrease the production of other. That is as the society move along PPF from point A to B and to C, the production of Corn rises and that of other good falls. That is if the producer put more and more resources in corn production, less and less will be put to produce other goods,and production of other good will fall.

d.The oppertunity cost is the cost foregone to produce the next best alternative. here to produce Corn the society has to give up wheat production. The oppertunity cost of producing corn is amount of wheat foregone to produce corn. For example, to produce 25 units of corn the society has to forego 15 units of wheat. In this case society moves from point A to D. The oppertunity cost of producing 1 unit of corn at point D is (25/15) units of wheat.