Answer to Question #188019 in Microeconomics for Rolivhuwa

Question

1 explain the role of ceteris paribus in economic analysis

2give an example of economic problem involving opportunity cost that SA government is curretly facing

3define a production possibility curve and use such a curve to illustrate scarcity,choice and opportunity cost 10 marks

Answer 1

1.

Ceteris paribus is an assumption in economics that means “other things being equal”. It helps isolate multiple independent variables that affect the dependent variable to some degree. It makes economic analysis easier and provides a basic understanding of complex economic problems. Without ceteris paribus understanding economic principles would be much more difficult as analyzing real-world economic scenarios is extremely complex.

2.

The opportunity cost (OC) is the total cost of keeping any resource under its current use. It also involves the potential benefits that could have been reaped by putting the resource in its alternate use, as a cost. Any economic problem pertains to making a choice as the same resource can be put to many uses and there are OC involved in each use.

The SA government has resources in the form of tax revenues that they generate to spend in such a manner as to raise the overall welfare of the society. The funds could be allocated to healthcare, education, subsidies to crucial industries, or economically backward sections, etc. Hence, it is faced with the problem of allocating those resources which have alternative uses.

3.

We define a production possibility curve as the curve which shows all possible combinations of two goods which an economy can produce with given resources and technology. It is downward sloping because resources are limited and to increase production of one good, the production of other good must be sacrificed.

The resources are scarce meaning that wants are unlimited while the resources are limited leading to scarcity of resources and hence, choice must be made between various alternative uses of resources.

In the above diagram, two goods x and y are produced in economy and the PPF is a downward sloping concave to origin curve which means as we have more units of one good we will be willing to give up more of it to gain another good.

In order to have one more unit of good y, we need to sacrifice 2 units of good x, which represents opportunity cost at that point.