Answer to Question #274627 in Microeconomics for Vin

Question

Explain how production possibility curve illustrates scarcity,choice and oppourtunity cost

Answer 1

Solution:

The Production Possibilities Curve (PPC) is a model that captures scarcity and the opportunity costs of choices when faced with the possibility of producing two goods or services. Points on the interior of the PPC are inefficient, points on the PPC are efficient, and points beyond the PPC are unattainable.

Scarcity implies a situation when if we want to increase the production or consumption of one good then we have to decrease the production or consumption of the other good. Therefore, if you want to increase the resources of good X then we have to decrease the resources in good Y on the PPC.

Choice refers to the process of selection from the available limited alternative resources. Looking at the PPC curve, then you know that your resources are limited to what quantity of a good you want to choose.

If you want good X then you have to decrease the consumption of good Y

 

Opportunity cost refers to the value of a factor in its next best alternative use. Y-axis shows use one and x-axis shows used two of a given set of resources.