Answer to Question #282579 in Economics for Hafsa

Question

What is the relationship between opportunity costs and the production possibility frontier of a nation? How does the production possibility frontier look under constant opportunity costs? What is the relationship between the opportunity cost of a commodity and the relative price of that commodity? How can they be visualize graphically?

Answer 1

1) Opportunity cost can be illustrated by using production possibility frontiers (PPFs) which provide a simple, yet powerful tool to illustrate the effects of making an economic choice. A PPF shows all the possible combinations of two goods, or two options available at one point in time.

2) If opportunity costs are constant, a straight-line (linear) PPF is produced. This case reflects a situation where resources are not specialised and can be substituted for each other with no added cost.

3) Assuming that prices equal costs of production, the opportunity cost of producing a commodity is equal to the relative prices.