Describe How The Production Possibility Frontier Can Be Used To Demonstrate Opportunity Cost And Explain The Effects Of Unemployment And Technological Change On Production And The Economy

845 words - 4 pages

Comment by Author: Different opening sentence? not so sure about it….
Opportunity costs are the “cost” of a choice when you pick the other choice. A production possibility frontier shows how opportunity costs can occur when individuals or communities make choices. The production possibility curve can also show various combinations of two alternative products that can be produced; given the technology and a fixed quantity of resources, when all resources are used to their full capacity. However, production possibility frontiers can change when events such as; new technology being discovered for the aid of one of the resources can push the frontier outwards. Unemployment can also appear on a production possibility curve when resources are not being fully employed.

The production possibility frontier can be used to demonstrate opportunity cost as it shows how much of each good or service could be produced, using all resources. The production possibility curve shows the upper limit of what an economy can produce at any given time. All points on the frontier represents points at which the economy is operating at its full productive capacity, meaning that all resources are being used. Figure 1 demonstrates that if 200 of Good A were to be produced then only 60 of Good B could be produced with the resources available (shown at point A). This the makes the opportunity cost of 200 of Good A, 30 of Good B. However,when society wants to change its production combination, there is a cost involved. In Figure 1, by switching combinations to produce 90 of Good B, instead of 60, would cause the production of Good A to decrease to 160 being produced, instead of 200. This then creates a higher opportunity cost 40 of Good A, when 90 of Good B is produced. The opportunity cost of one unit of Good A by dividing up the 40 units given up by the 30 units gained, making the opportunity cost of one unit of Good A, 1.3 units of Good B. Any point on a production possibility frontier can be chosen, though many choose the most desirable option on the production possibility frontier, as it offers the most gain to the society or individual. Figure 1 - Straight line production possibility frontier demonstrating the opportunity cost of two goods and services.
Figure 2 - Concave production possibility frontier showing the points of unemployment and full employment.

If the economy were producing at a point inside the curve, it would be producing less than its maximum possible output and resources would not be fully employed to their capacity, therefore creating unemployment. Unemployment occurs when any resources are not...

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