Principles of economics Essay Example | Topics and Well Written Essays - 3500 words

Principles of economics - Essay Example Also called the transformation curve, the PPC's concept is used in macroeconomics to show the production possibilities available to a nation or economy and also in microeconomics to show the options open to an individual firm. All points on a production possibilities curve are points of maximum productive efficiency or minimum productive inefficiency: resources are allocated such that it is impossible to increase the output of one commodity without reducing the output of the other. That is, there must be a sacrifice - an opportunity cost - for increasing the production of any good. All resources are used appropriately and as completely as possible-without the situation becoming unsustainable (Wikipedia Website). In economics, countries, firms, and individuals have to make choices as to how to use or allocate their resources. Suppose a farmer has to make a decision on buying feeds. He has two choices BRAND A and BRAND B, which are similar in all aspects and differs only on the label. When the farmer decides to use BRAND A, he cannot use the same resources to buy BRAND B. The choices this farmer face and the opportunity cost of buying one good rather than another can be illustrated using a PPC graph. The graph will be a straight line. In this case, the curve represents efficiency and it sh... Let's change the other product to fertilizer. With the increasing cost of fertilizer, the farmer could not afford to buy the feed at exactly the same ratio as buying the same feed, as illustrated in Fig. 1. In this case, the opportunity cost increases towards the extreme origin as illustrated in Fig. 2. If for instance, the farmer obtained a new technology in decreasing his usual usage of the fertilizer but with the same effect. This would mean that he could now increase the capital to be used in buying feeds. Thus, an outward shift will be seen in the PPC as illustrated in Fig. 3. In the study of the PPC, it is also of essence to elaborate on the determinants of supply which often causes the shifts of the supply curve. These are: Technology Factor Prices, Number of Suppliers, Expectations of the Future and the Environmental Conditions. A CHANGE IN QUANTITY SUPPLIED means that only the price has changed and a new quantity is supplied along a constant supply curve. A CHANGE (DECREASE OR INCREASE) IN SUPPLY or a SHIFT IN SUPPLY means that a change in amount supplied occurs because of a change (shift) in the position of the supply curve. This SHIFT IN SUPPLY means that one of the other determinants of supply (technology, resource prices, taxes or subsidies, expectations, and the price of other goods produced) has changed (Sosin, 2005). In Fig. 4, resource prices went up so that less is supplied at each price. This shift could also be called a DECREASE IN SUPPLY. 2. a. Rise of Prices of Wheat When the price of wheat is increased, it also means that the price of bread will increase proportionately, since wheat is a main ingredient of