What are the 4 assumptions of a production possibilities curve?

What are the 4 assumptions of a production possibilities curve?

The four key assumptions underlying production possibilities analysis are: (1) resources are used to produce one or both of only two goods, (2) the quantities of the resources do not change, (3) technology and production techniques do not change, and (4) resources are used in a technically efficient way.

What does a linear production possibilities curve indicate?

The production possibilities curve (PPC) is a graph that shows all of the different combinations of output that can be produced given current resources and technology. Sometimes called the production possibilities frontier (PPF), the PPC illustrates scarcity and tradeoffs.

Under what conditions is the PPF linear rather than bowed out?

Under what conditions is the production possibilities frontier linear rather than bowed out? The production possibilities frontier will be linear if the opportunity cost of producing a good is constant no matter how much of that good is produced.

When can PPC be a straight line?

A PPC curve can be a straight line only if the marginal rate of transformation (MRT) is constant throughout the curve. A MRT can remain constant only if both the commodities are equally constant and the marginal utility derived from their production is also constant.

What are the types of opportunity cost?

The two types of opportunity costs are explicit opportunity cost and implicit opportunity cost. Explicit opportunity cost has a direct monetary value.

Why is production possibility curve called opportunity cost curve?

(ii) PPC is also called opportunity cost curve because each and every point on PPC measures the opportunity cost of one commodity in terms of sacrificing other commodity. …

What is the relationship between production possibility curve and opportunity cost?

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.

How do you determine opportunity cost?

The formula for calculating an opportunity cost is simply the difference between the expected returns of each option. Say that you have option A—to invest in the stock market hoping to generate capital gain returns.

Which scenario is the best example of an opportunity cost?

The opportunity cost of taking a vacation instead of spending the money on a new car is not getting a new car. When the government spends $15 billion on interest for the national debt, the opportunity cost is the programs the money might have been spent on, like education or healthcare.

Can a PPF be a straight line elucidate?

In the context of a PPF, opportunity cost is directly related to the shape of the curve (see below). If the shape of the PPF curve is a straight-line, the opportunity cost is constant as production of different goods is changing.

Why does PPC shift left?

When the economy grows and all other things remain constant, we can produce more, so this will cause a shift in the production possibilities curve outward, or to the right. If the economy were to shrink, then, of course, the curve would shift to the left.

What are the assumptions of opportunity cost curve?

The opportunity cost curve has been called as the ‘transformation curve’ or ‘production possibility curve’ by Paul Samuelson and ‘ production frontier’ or ‘production indifference curve’ by A.P. Lerner. Haberler’s opportunity cost theory rests upon the following main assumptions: (i) The economic system is in a state of full employment equilibrium.

What is the purpose of the production possibilities curve?

The Production Possibilities Curve (PPC) is a model used to show the tradeoffs associated with allocating resources between the production of two goods. The PPC can be used to illustrate the concepts of scarcity, opportunity cost, efficiency, inefficiency, economic growth, and contractions.

What is the opportunity cost of a combination of production?

The opportunity cost of moving from one efficient combination of production to another efficient combination of production is how much of one good is given up in order to get more of the other good. The shape of the PPC also gives us information on the production technology (in other words, how the resources are combined to produce these goods).

What are the disadvantages of the concept of opportunity cost?

The following are leveled against the concept of opportunity cost : 1. Opportunity costs in the case of factors of production can’t be calculated easily. 2. This concept is not useful for calculating the risks and pains undergone by the entrepreneur in production process. 3. This concept is applicable only when perfect competition prevails.