![]() The company takes the best resources suited for the production of healthy products (“Introduction to Economics” par. When the firm decides to increase goods production from 10 to 20, the first resources reallocated to producing the reliable goods are those that were not well suited to producing factory goods. In our graph, the two commodities are factory products and farm goods. The law of increasing opportunity cost is correct, and it shows us that resources are not all the same (Chodorow-Reich and Karabarbounis 10). The law sanctions that as you increase the production of one product in a firm, the opportunity cost to produce the additional stock will also increase. It gets achieved by applying the law of increasing opportunity cost. The opportunity cost of increasing farm goods (from 10 to 20 – b to c) is higher than the opportunity cost of growing agricultural products (from 60 to 70 – e to f). Comparison of a movement from b to cįrom the graph, movement from point b to c has a slight difference than the change from e to f. ![]() It is called the opportunity cost (the cost of an item measured in terms of alternative foregone). 50 tons of factory goods production would be given up to produce ten more tons of farm products. Therefore, the opportunity cost of a rising goods production from 10 to 20 tons is 50 tons of factory goods. Additionally, the growth in the technical knowledge increases the outward shift of the production possibility curve.įor the economy to change from point b to c, this would mean that firm production would have an increased from 10 tons to 20 tons and factory goods production would be reduced by 50tons. Capital goods include factories, power stations, transport networks, and machinery. ![]() It happens in case there are alterations like increases in the labor force, increases in the capital stock. Output outside the production possibility curve becomes a possibility to produce with the increase in the country’s production ability (Rasmussen 34). They represent the highest possible outputs of the two products. These points along the production possibility curve include B, C, and E. However, whenever the production is along the frontier, it means that the resources get used entirely. It would also see an increase in technological knowledge which again leads to increased output through resourceful use of resources and reduced wastage. An upsurge in the stock of capital goods (factories, power stations, transport networks, and machinery) would also see an efficient utilization of inputs. It can happen when there are changes such as a rise in the labor force which would see an increase in production outputs. In this case, there is an ability increase for the economy to produce. It is possible for an economy to reach points outside the production possibility curve. An economy attaining points outside the production possibilities curve It may lead to a lower production and hence the shift in the production possibilities inwards. In case of inflation that sees an increase in the cost of resources like raw materials and labor, a firm may be forced to acquire a lower quantity of raw materials (McConnell and Brue 45). ![]() Production would then be little, hence making the curve shift inwards.Īnother factor may be inflation. Use of these methods of production may lead to the firm not utilizing well, the resources they have or even misuse the same resources. A significant rise in taxes collected on these would mean that firms in that economy would now consider using outdated and inefficient production techniques to avoid the taxes levied on the alternative. One factor is the increase in the taxes levied on the use of modernized production techniques and automated machinery. The nation’s resources are not being properly used, or even use of outdated production techniques is being employed (Fare, Grosskopf and Lovell 67). A curve below the production possibility curve of an economy (assuming the curve was concave to the origin) shows underutilization of resources in the economy. ![]() The possibility of a nation’s production possibility curve was ever shifting inwardsĪ nation’s production possibility curve can turn inwards. It comes from an assumption that a firm’s resources cannot be correctly occupationally mobile. When plotted on a graph, the graphs are not the typical straight line but curves. It shows all the combinations of two manufactured goods given the available resources. A curve that is used to describe the possibility of production is one that shows the prospect cost of making use of scarce resources for production instead of other goods or services. ![]()
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