Answer to Question #259184 in Microeconomics for Nextel

Question

What is the trade off from increasing the production of consumer goods? Answer using a diagram.

Answer 1

PPF is the curve that depicts the optimal (maximum) combinations of two outputs that an economy can generate under three conditions: 1) Technology is fixed; 2) Resources are fixed; and 3) Resources are utilized to the maximum extent possible. As a result, all points in PPF are efficient, and moving from one efficient point to another means producing more of one product while producing less of the other. Because of the shortage of resources, this results in a trade-off.

Inside PPF, all points are inefficient. These points are reachable (e.g., point U), but they do not fully utilize the available resources. If technology or resources are utilised to their full capacity at point U, the economy may be at point B or C, implying that more is created.

Outside of PPF, all points are unreachable (e.g., point Z). Only if technology or/and resources improve, and the economy's PPF changes to the right, might Point Z be reached. This type of movement is referred to be economic growth.

Increasing Opportunity Costs Law

A trade-off between military and consumer goods can be seen by moving from point A to B, B to C, and C to D. The only way for this economy to generate more consumer goods is to produce less military items, or to give up some military manufacturing. So, in order to get from point A to point B, the economy produces 40 consumer products while giving up 20 military goods. As a result, the opportunity cost of the first 40 consumer items is equal to the cost of 20 military goods.

When the economy moves from B to C, it produces an additional 40 consumer products (for a total of 80) while giving up an additional 60 military goods. As a result, the second batch of 40 consumer goods has a military opportunity cost of 60 dollars.