Opportunity cost and Production Possibility Frontier - Coursework Example

Topic: Opportunity cost and Production Possibility Frontier Introduction As far as macroeconomics is concerned, the production possibility frontier denotes the point where the economy produces commodities and services in the most efficient manner, and thus allocates its resources in the most optimum way. In the event that the economy is not producing the quantities that PPF indicates, this implies that the management of resources is inefficient and there will be a decline in the production of the society. The production possibility frontier implies that boundaries to production exist, thus in order to achieve efficiency, economiesshould make the decision on the set of goods and services that should be produced (Arnold, 2004). Opportunity costs arise in the cases where an economic agent makes a choice between alternative means of allocating resources that are scarce, therefore, the opportunity cost in this case is the value of the second best alternative utilization of scarce resources. Meaning of opportunity cost Opportunity cost can be defined as a profit, value or benefit that should be foregone in order to gain a different one, and since all resources can be used in alternative ways, all actions, choices and decisions can be linked to an opportunity cost. This aspect is important in economics and is used in the computations of cost benefit analysis of projects. Nonetheless, opportunity costs are never recorded as account entries but are acknowledged in making decisions through computation of cash outlays and the profits and losses that result from them (Wetzstein, 2013). For instance, the opportunity costs of enrolling for college is the money that may have been earned if an individual decided to seek employment instead. Conversely, the individual will lose his or her salary for four years in the process of acquiring a degree while hoping to earn more in the careers that he or she will pursue after getting the education. Therefore, in opportunity costs, a decision between two choice must be made and even though it would be simpler if one was aware of the outcome, the risks of achieve more benefits with an option is the actual opportunity cost. The relationship between opportunity cost and Production Possibilities frontier Production possibility curves are utilized in production economics in demonstration of the amount of commodity that a company can decide to produce considering that it has limited resources that it has to allocate in an efficient manner between the two commodities. The quantity to be produced for the first commodity is placed on the Y axis and the other on the X axis with points on the curve and below it indicating varying combinations. Specifically, the ones on the curve indicate the production possibilities that are efficient, while the downward slope of the curve indicates that so that the production of one commodity can be increased, the quantity of production of another must be decreased (Mankiw& Taylor, 2011). The amount of the first commodity that has to be foregone so that the second commodity can be increased by one unit is the opportunity cost associated with the production of the extra unit of the second commodity. It is also imperative to note that the curve is shaped concavely indicating an increasing opportunity cost for every extra unit of the second commodity that is produced. Figure 1 Scarcity, opportunity cost and Production possibilities curve (frontier) A production possibility curve is a theoretical illustration of the amount of two varying commodities that can be achieved through shifting resources from producing one to producing the other. The curves are utilized in the description of society choices between two varying commodities. In Figure 1, two goods are shown as consumption and investment where investment commodities are those which are used in the production of additional consumption commodities. Some of these are physical capital like machines, roads and buildings as well as human investments like training and education. A cumulative total of all the investments constitute the societies capital stock and to demonstrate the point where all the resources were utilized in the production of commodities for consumption, a movement straight up the vertical axis of the curve is required (Mankiw& Taylor, 2006). To identify the point where all the resources were utilized in the production of investment commodities, a straight movement on the horizontal axis of to the curves is required. These two points are unrealistic and extreme, with points A and B being more realistic, where point A indicates higher consumption and lower investment, while point B indicates higher investment and lower consumption. Figure 2 The production possibility curve indicates the trade off in producing investment and consumption goods and any two classes of varying commodities may be chosen as long as they are arbitrary. The use of the curve is for a specified period, what may be produced through combining the two commodities, when all resources are utilized and when institutions and technology remain unchanged. In this conditions, the output potential of a society is achieved at any point of the curve and this is referred to as the frontier of the production possibility curve. Interpreting Production Possibilities Frontier In a production possibility frontier, curves or lines act as benchmarks for measuring efficiency and if a particular point on the graph is higher than the curve, it symbolizes efficiency, while all points below the curve denote inefficiency. For additional assessment, more information is usually supplied with production possibility frontiers such as the time needed for the observation, technologies utilized for the production as well as the amount of input that can be assessed. Economies usually employ PPF in illustrating various concepts of economics such as opportunity cost, economy of scales and scarcity among others. In the event that an economy operates on the PPF curve, it implies that it is efficient and it is impossible to produce a higher amount of one commodity without reducing the production capacity of another commodity. In the same manner, in the event that the economy operates below the PPF curve, it indicates inefficiency and thus the economy is able to shift resources in order to produce more of the two commodities. The PPF graph demonstrated the manner in which resources should be shared among commodities when they are being produced. Various points on the graph indicate tradeoff between the commodities, for instance, if more of one commodity should be produced, the resources utilized by the second commodity have to be decreased and shifted to the first good. The three forms of graphs associated with PPF; the inverted PPF, the common and the straight line, are affected by opportunity cost (Jorgenson, 2000). The slopes PPF, which are also called marginal rate of transformation, signify the rate at which production degree of a commodity can be shifted to another commodity. PPF graphs help economists in studying the state of production along with possible production conditions and when production is graphed and tracked, it enables adjustments to be made to function to make the economy stable and grow. Increasing opportunity cost Increases in production lead to increase in opportunity costs and this can be demonstrated through reviewing an example of an economy that is involved in the production of two commodities like mangoes and vehicles. In the event that all the resources of this economy are directed towards the production of mangoes, factors of production available for the production of cars would not exist. Therefore, the outcome will be an output of a specific number of mangoes but zero cars, and vice versa in the event that all factors of production are directed at producing vehicles. Between the two extremes are conditions where some mangoes and some vehicles are produced and three assumptions can be arrived at in this scenario. These assumptions include: everyone in the economy is employed and production is done using the best technology and there is a maximization of production efficiency created the question as to what will be the costs of production for more vehicles and mangoes. In the event that the economy maximizes all the inputs, then the cost of every unit becomes more expensive and the economy is forced to bear cost that are more variable like overtime in the production of the unit. Marginal analysis of economic decision Marginal analysis may be defined as an assessment of additional benefits of activities in comparison to additional costs associated with the same activity. Companies utilize marginal analysis as a decision making instrument to assist in maximization of profitability while individuals utilize it to make numerous daily decisions. It is an aspect that is utilized broadly in microeconomics when assessing the manner in which a complicated system is impacted by marginal manipulation of variables (Mankiw& Taylor, 2006). For instance, if an individual already exercises four times in a week and is considering adding one more day, he or she would utilize marginal analysis in determining if the benefits of adding the extra day, like burning more calories, building muscles and gaining endurance would be worth the cost of adding the extra day like forfeiting sleep, increasing propensity to injury and having less energy. Conclusion A production possibility frontier is associated with an increasing opportunity costs in the cases where the opportunity cost of a product become bigger as a higher number of the product is produced, which has a negative effect in specialization, and the production possibility frontier becomes bowed out into a circular shape. On the other hand, the production possibility Frontier will have a circular shape when the opportunity cost remainsunchanged and when the opportunity cost of the product remains the same regardless of the degree to which it is produced making the production possibility frontier straight. Lastly, production possibility frontier is associated with a decreasing opportunity cost in the cases where opportunity costs of a product diminishes with increase in its production, which promotes specialization, and in this case, the production possibility frontier will be bowed in, to resemble a crescent shape. References Arnold, R. (2004). Macroeconomics. Mason, Ohio: Thomson South-Western. Jorgenson, D. (2000). Econometric modeling of producer behavior. Cambridge, Mass. [u.a.]: MIT Press. Mankiw, N., & Taylor, M. (2006). Economics. London: Thomson. Mankiw, N., & Taylor, M. (2011). Microeconomics. Andover: South-Western. Wetzstein, M. (2013). Microeconomic theory. 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