Answer to Question #109833 in Economics of Enterprise for Cote

Question

With aid of a well labelled production possibility curve explain each of the following concepts: Efficiency
Opportunity Cost
Scarcity Choice

Answer 1

To solve the main economic problem - what, how and for whom to produce - a model of the curve of production opportunities is used.

Imagine a hypothetical country whose inhabitants can use their human, industrial and natural resources to produce two groups of goods - bread (X) and cannons (Y).

CPV of their economy is constructed as follows. If all the country's resources are involved in the production of cannons, the country will be able to produce them in volume A, while the production of bread will be zero, and vice versa, if all the resources will be involved in the production of guns, the country will be able to get it in volume D, but at the same time she will not be able to release a single gun.If the resources are distributed in certain proportions between the production of bread and cannons, then they will be able to choose any combination of X and Y. Combining all the points characterizing the possible release of two groups of goods, we obtain the CPV of this country.

So, if a country wants to choose point B instead of point A, it will have to abandon the production of part of the product Y to increase the output of goods X. Point F is defined as inefficient, since an increase in the output of one of the goods can be achieved without reducing the output of the other.

The principle of the efficient allocation of resources is called in economic theory the name Pareto-Efficiency by the name of the Italian economist Wilfredo Pareto.

Let's say that a hairdresser gets 500 den. units per month, but has the qualification of a car repair technician and can work in a car service, receiving a monthly income of 1,500 den. units In this case, the opportunity cost of his work as a hairdresser is 1,500 units. As you can see, opportunity costs are the losses of other, alternative benefits (goods, salaries, dividends, etc.) that could be obtained from the same resources.