Understand how to graph and analyze a PPF.Define opportunity cost and apply it to daily situations.Understand how economic models work to simplify complex problems.The different combinations goods (wheat and machine) which and economy can produce reveal two basic facts.By the end of this section, you will be able to: It shows alternative combination of a, a 1, a 2 of wheat and machines. In figure, PP is the Production Possibility Curve. The different points on PP Curve represent different possibilities of allocation of resources. allocation of resources is represented along the Production Possibility Curve (PP Curve). For example, the economy must decide what proportion of its resources should go into the production of civilian goods and what proportion into the production of goods needed for defense. Production Possibility Curve (PP Curve) solves the problem of allocation of resources in an economy: Due to scarcity of resources, an economy has to decide what commodities have to be produced and in what quantities. Opportunity cost is the cost of choosing best opportunity (of resources utilization) in terms of the loss of value (or the loss of output) if the given resources were utilized in the next best (or second best) opportunity. Comparing opportunity 3rd with opportunity 2 we find that loss of 12 ton wheat (worth 24,000) is the maximum loss that we one suffering when we are choosing opportunity 3 (which happens to be the best opportunity, This maximum loss of 12 ton wheat (worth 24,000) is the opportunity cost of using land for the production of sugarcane. Opportunity 2 (offering 12 ton of wheat worth 24,000) is the 2nd best, also called next best opportunity. So obvious, because with the given resources any one opportunity can be availed, not more. Choice of opportunity 3 causes, loss of opportunities 1 and 2. Opportunity 3 : 25 ton of sugarcane (worth 30,000)īeing a rational producer (aiming at maximization of profit), we will chose opportunity 3, using land (and other input) of the production of sugarcane worth 30,000.Opportunity 2 : 12 ton of wheat (worth 24,000).Opportunity 1: 10 ton of rice (worth 20,000).We may the following opportunities (or possibilities) of production: Illustration: Using a given piece of land (and other inputs). It is the cost of choosing one opportunity in terms of the loss on next best. Which in turn is the crux of the economic problem.Ĭoncept of opportunity cost: Opportunity cost is the benefit that is foregone to avail the benefit of another opportunity. We find that a country (or a household) is always confronted with the problem of making adjustments between limited means with alternative uses and unlimited wants having different priorities. The problem is essentially of making a choice. Problem of choice is also called the problem of allocation of resources to alternative use : Unlimited wants and limited resources give rise to economic problem. In fact, it is related to the problem of allocation of resources to different use. Production of rice, we must exercise our choice whether to produce wheat or rice or how much of rice and how much of wheat.To illustrate, if there are two options for the use of land viz. We must exercise choice among different options available to us. Because resources are scarcise and have alternative use, we must confront the problem of choice. It is also because resources have alter native uses. Greater the scarcity of a time, higher in its market price.Ĭoncept of choice : Scarcity is a problem not simply because resources are scarce in relation to human wants. But all resources are not equally scarce all the time. It is always studied with reference to human unlimited wants with the means or the resources are limited. Scarcity is the root cause of economic problem : Scarcity is a relative concept. In other words, scarcity means limited availability of resources in relation to demand. Scarcity is a situation in which resources available for the satisfaction of wants are less than the resources required for the satisfaction of human wants. This is true of all kinds of economies rich and poor developed and underdeveloped. Human wants are endless where as resources are scarce. Concept of Scarcity : In economics, we always refers to scarcity of resources available to us for the satisfaction of our wants.
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