Question

What simplifying assumptions do we make when we produce a Production Possibility Curve/Frontier (PPC)? What does a PPC show? Explain what opportunity cost is and provide an example of how to measure opportunity cost. Generally, in our economy we face “Increasing Opportunity Cost,” explain why this is the case.

Answer 1

Ans) 1) PPC shows possible combination of goods that can be produced in an economy. It also shows the opportunity cost involved in producing those goods. Assumptions made in PPC model are÷

• There are only two goods.
• Same resources can be used to make either of or a combination of both goods.
• Technology is constant.
• There is full employment of resources and are technically efficient.
• Fixed or limited resources.

2) Opportunity cost is the cost of something that must be given up to get something else. For eg- you have two hours, you can spend it either by studying or by playing. Suppose you choose to play. So, here, the opportunity cost is the value of time that you chose to forgo.

Opportunity cost = sacrife ÷ gain.

3) In general, we see that there is increasing opportunity cost. And due to this reason, PPC is bowed outwards.

As we increase the production of one good, opportunity cost increases because of the reallocation of resources which were best suited for the original product.