MBA FP6008 Assessment1 Possibilities – Economic Analysis 1

19 May No Comments

Possibilities: Economic Analysis

BA FP6008

Global Economic Environment

Capella University

Production Possibilities

The production possibilities curve represents two hypothetical amounts of goods that can be obtained by shifting their resources from production of one to the production of the other. The production possibilities curve describes society’s use or choice between two different goods (Renner, n.d.).

Part 1

Figure 1

Analyze Data/Assumptions

When there is a lack of resources wants and needs cannot be satisfied. Even if the economy uses resources correctly capabilities are restricted due to the lack of resources. As a society we cannot have everything we want which forces us to make economic decisions. These are choices that alternate goods and services that satisfies our needs and wants (Chand, n.d.).

Out of a range of possibilities society must decide what to produce. With assumed possibilities economist decide between guns and butter in the production possibilities curve shown above that shows possible combinations of two goods guns and butter produced with given resources and technology with the assumptions of fixed economic resources having the ability to be transferred from one to the other, there can only be two goods produced with the resources given, resources must be fully utilized, there is no equality in the production of the product (transferred resources must reduce or decrease productivity) and technology must be constant (Chand, n.d.). In this given example of guns (a capital good) and butter (a consumer good) if resources are moved from guns those resources can be used to produce butter.

In this example the cost of producing more butter at point C means there would be a loss of guns by two not produced. This is a ratio of butter to guns at 1:2. The way to produce more guns is to reduce production in butter. The shape of the production possibilities curve shows how one good is sacrificed for the other good. This is called MRT or marginal rate of transformation. Here MRT = ∆Units Sacrificed/∆ Units Gained (MRT = ∆ Guns/ ∆ Butter).

The slope of the production possibilities curve is downward from left to right indicating that more of one good is produced only by taking the resources away from the other good being produced (Chand, n.d.).

Hypothetically producing one item of butter and ten guns depicts a shift in economic resources where the economy isn’t utilizing its maximum resources. The economy only operates when resources are fully utilized. Resources must be used in the best way for the economy to operate. Maximum utilization at this point means that the economy cannot produce outside of the current production possibilities. There needs to be additional resources if production is outside of the curve. When the economy operates inside or on the curve is an attainable combination while operating outside is an unattainable combination (Chand, n.d.).

When there is an outward shift in the production possibilities curve this may indicate an economic change due to technology or resource increase which will affect the production of guns and butter differently. An inward shift signifies a decrease in production due to technology or resources while an outwards shift signifies an expansion of production possibilities that are due to technology or resources. If the shift is skewed this is an indication that technology affected both guns and butter in different ways (Tomlinson, n.d.).

If there is no trade between countries production of products will only be utilized in the country where the product is produced. For trading, the production possibilities frontier (PPC) is also the consumption possibilities frontier. Trade helps consume the products outside the production possibility frontier. The unitization of trade benefits in the areas of technology and resources pushing out or expanding the production possibilities frontier area (Lumen, n.d.).

Part 2

Analyze the Concept of Opportunity Cost

Opportunity cost is a benefit that is received but is given up in order to take a different course of action or an alternative that may be given up when there is a decision being made. Opportunity cost is relevant for two events that are exclusive. For investment purposes it is the difference in return of two investments, one that is chosen and one that is passed up (Investopedia, n.d.).

In relations to economics opportunity cost of a resource is the value of the next highest valued alternative for use of that resource. Meaning money and time spent on going to the movies means you cannot spend that time reading a book at home and the money spent on the movie cannot be spent on something else. If reading a book is the next-best alternative to the movie the opportunity cost of the movie is money spent plus having the pleasure gone by not reading a book. Simply stated economically, the cost of using a resource comes from the value of what it could be used for instead (Henderson, n.d).

In this either or situation of allocating for advertising or the investment of new plant and equipment the greater opportunity cost is in advertising. Investing in a new plant and its equipment increases production changing the PPC while investing in advertising may or may not increase sales. Advertising can have increases based from sales with no known knowledge of just how much business would increase with allocation for advertising. For this, a budget is needed to help allocate expenses on where to spend your money on advertising. Whereas investing in a new plant and equipment for sooner production makes resources unavailable for use now.

Part 3

Apply the Concepts of marginal cost and Marginal Benefit

Marginal cost references opportunity cost associated with the production of producing an additional unit of a product. In the concept of economics it is the value of highest alternative opportunity whereas marginal benefits is what people are willing to give up to obtain an additional unit of a product where marginal cost is the value of what is given up. Marginal benefit should exceed marginal cost when additional units are being produced (Investopedia, n.d).

A real word example for me happened recently. I needed to make the decision on whether to attend my son’s AAU basketball game or stay home. Going to the game had cost associated with it. The cost of going to the game included paying a fifteen dollar entry fee, buying gas for travel to Raleigh NC from High Point NC and paying for two meals each for the both of us (lunch and dinner) since this was an all-day tournament or me staying at home and sending my son with his coach and only paying for his two meals but missing the opportunity of seeing him play three of his best tournament games.

One other real world example is grocery shopping for his morning oatmeal. My son loves Apple Cinnamon Oatmeal. When shopping for his oatmeal I tried purchasing the store brand over the Quaker brand. He noticed the difference in texture of the two brands. Though it is more cost effective to purchase the store brand because of the difference in texture I purchase the Quaker brand.

Conclusion

The production possibilities curve helps to determine how resources in an economy are allocated for optimal output. This helps countries with trading their products with others rather than keeping for their own needs. The curve also shows scarcity of product. Producing more of one unit takes away from the production of the other unit (in this assessment butter and guns). Points on the PPC is a representation of two products that an economy can produce using its available resources.

References

Chand, S. (n.d). The Production Possibility Frontier (PPF): Assumptions, Characteristics and other Details. Retrieved from

The Production Possibility Frontier (PPF): Assumptions, Characteristics and other Details

Henderson, D.R. (n.d). The Concise Encyclopedia of Economics. Opportunity Cost. Retrieved from

http://www.econlib.org/library/Enc/OpportunityCost.html

Investopedia, (n.d). Marginal Benefit and Marginal Cost. Retrieved from

http://www.investopedia.com/exam-guide/cfa-level-1/microeconomics/marginal-benefit-cost.asp

Investopedia, (n.d). Opportunity Cost. Retrieved from

http://www.investopedia.com/terms/o/opportunitycost.asp

Lumen, (n.d.). Lumen Boundless Economics. Introduction to International Trade. Reasons for Trade. Retrieved from

Introduction to International Trade

Renner, D. E. (n.d.). Production possibility curves. Retrieved from

http://krypton.mnsu.edu/~cu7296vs/ppc.htm

Tomlinson, S. (n.d.). Understanding How a Change in Technology or Resources Affects the PPF.

Retrieved from

http://college.cengage.com/economics/0538797274_mceachern/student/lecture/8346.pdf




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