School of Economics

Opportunity cost and marginal opportunity cost Opportunity cost:  It is the cost of availing one opportunity in terms of loss of other opportunity. In other words, it is the cost of shifting resources from one use to the another. It is equal to loss of output in use-1 when resources are shifted from use-1 to use-2. It is also called total opportunity lost. Marginal opportunity cost:  It refers to loss of output of one goods to gain an additional unit of other goods. let's say, if we shift resources from production of goods-y to production of goods-x then we loss 10 units of goods-Y and we gain 2 units of goods-X, then marginal opportunity cost= loss/gain therefore 10/2=5, In easy word, to produce one unit of goods-X we have to sacrifice 5 unit of goods-Y.It is also called marginal rate of transformation. Table-2 Units of Goods-X Units of Goods-Y Opportunity cost Marginal opportunity cost 0 100 - - 10 ...

 Rotation of Production possibility curve: PPC can rotate in following circumstances. 1-Improvement in the technology in the favour of good -X : If there is an improvement in the technology in favour of goods -X then the production of goods-X raise on that the particular resources but production of goods-Y remains the unchanged accordingly PPC rotates. Fig-6 Before the improvement in technology in the favour of goods-X the PPC is ab but after improvement it rotates and be ac. 2-Improvement in the technology in the favour of good -X :  If there is an improvement in the technology in favour of goods -Y then the production of goods-Y raise on that the particular resource but production of goods-X remains the unchanged accordingly PPC rotates. Fig-7 Before the improvement in technology in the favour of goods-Y the PPC is  ab  but after improvement it rotates and be  ac. Note: If any technical improvement done in favour of both goods then PPC will shift, not rotate....

 Attainable and unattainable combinations of PPC : Those combination which are lie either on PPC or the inside of PPC are called attainable combinations, but those combinations which are lie outside the PPC are called unattainable combination of PPC.  Figure-2 In the figure-2, A,B,C& Z are attainable combinations of PPC, where combinations A,B,C offer fuller utilisation of resources but combination Z offers underutilisation of resources, while on the other hand combination K is unattainable combination. For more detail: please watch this video ,subscribe #vc official on youtube.

Production possibility  curve Assumptions: 1-Resources are given and cannot change. 2-Given resources are fully and efficiently utilised. 3-Technology is constant. Production possibility schedule: It is the tabular representation of different possible combination of two goods which can be produced assuming above assumptions.   COMBINATIONS A B C D E RICE(in Kg) 100 90 70 40 0 WHEAT(in Kg) 0 10 20 30 40    Production possibility curve: It is a curve showing different possible combination of two goods which can be produced with given resources assuming above combinations. figure -1      Properties of slope of PPC: 1- Slope of PPC = loss of qn. of goodY                                      gain  of qn. of good X    2-PPC is concave. 3-PPC is downward left to right because to produce one unit of good-X we have to sac...

Solution to the central problem of an Economy in different economies. 1-In centrally planned economy: This is the economy in which social welfare is priority of economic agents so all economic decisions are taken by government or its authority .     a-What to produce- The government produce that good which is highly required by the society thus   social welfare is maximised , profit is ignored.      b-How to produce- Government uses labour intensive technique if there is unemployment in the  economy , if economy is in full employment level then government uses capital intensive technique  to   ensure to availability of low price goods in the economy.     c-For whom to produce- No doubt government produce for poor section of the society to maximise  social  welfare but growth is ignored. 2-In Market economy:  This is the economy in which profit maximisation is the priority of economic agents so all eco...

Central problem of an economy:  It is the problem which has to be faced to every economy whether the country is vibrant or stagnant, rich or poor, developed or backward because resources are limited and demand for resources is unlimited,resources have their alternative uses due to which problem of choice arises. It has three dimensions: 1-What to produce? 2-How to produce? 3-For whom to produce? 1-What to produce: This is the problem of choice of goods. It has also two dimensions.     a-What goods to be produced?     b-In what quantity goods to be produced? In every economy there are two types of goods, consumer goods (consumption goods like Icecream etc) and capital goods (producer goods like machines etc). If we put all resources to produce capital goods then our future will be good but currently we will suffer lack of consumer goods,and if we put all resources to produce consumer good then our present generation enjoy but our future generation will trouble. 2...