Production Technology and Resources †Free Samples to Students

Question: Discuss about the Production Technology and Resources. Answer: Introduction: Production Possibility curve, also known as production possibility Frontier shows maximum capacity of output of a nation given technology and resources. PPC is the locus of different combination of two goods that yield same level of output. With limited resource base, the increase in production of one good involves sacrifice of production of some other good (Mankiw 2014). The shift in resources from one industry to another is subject to an increasing opportunity cost. Every point on the PPC is feasible or attainable production points. Points outside the PPC cannot be attained. Any point on the PPC is efficient point of operation. An economy is said to operating inefficiently at somewhere below the PPC. A shift in the PPC occurs when there is an increase or decrease in output capacity. The outward shift in PPC reflects a situation of economic growth while an inward shift in PPC reflects economic contraction. Because of the presence of increasing opportunity cost Production Possibility Curve is in Concave shape. Suppose the economy produces two goods Butter and Guns using all of its resources. In order to increase production of butter from X1 to X2 the economy has to produce less guns as shown from a decline in guns production from Y1 to Y2. This is the idea of Production Possibility Curve. The concept of opportunity cost in economics is derived from the idea that limited resources are available to fulfill unlimited want of people. That is the economy always faces problem of scarcity. Every choice of people involve an opportunity cost. Opportunity cost is described as the cost of sacrificing something in order to make a particular choice. Alternatively, it can also be defined as the imputed value of second best alternative. People have many available alternatives while deciding over spending their money income. Everybody has 24 hours in a day. However, different people allocate their times differently. These decisions depend on opportunity cost. The opportunity cost arises because of the tradeoff that economic agents face. There is nothing called free lunch in the economy. In the world full of wants and limited resources, everything comes with an opportunity cost. Suppose an individual has a plot of land. In that land, either paddy or wheat can be produced. If the indiv idual chose to produce wheat then production of paddy and income from it is sacrificed. Here, the opportunity cost of wheat production is the sacrificed production of paddy. An application of the concept of opportunity cost is in the construction of Production Possibility Curve. The increase in production of one good within the boundary of PPC needs to sacrifice production of others. The concept of margin holds great importance in economics. In its most simple form, the term Marginal refers to something extra. The marginal quantity of a factor of production or any output is the recorded extra unit of that factor or output. The term is associate with many important concept of economics such as in utility, production and cost. The marginal utility of an item is the additional utility derived when an addition unit of that item is consumed. Marginal cost refers to additional cost generated from unit change in output. Marginal production is the unit change in total production due to the unit change in factor input (Fine 2016). Similarly, the concept of marginal revenue, marginal profits are used to take important economic decision. There are numerous applications of the concept of margins in economics. Consumers willingness to pay for a particular unit of a good depends on the marginal utility derived from the good. The minimum price at which suppliers supply their goods depend on the marginal cost of production. The equilibrium price and output of a profit-maximizing firm is determined at the point where marginal revenue equals with the marginal cost. Because of the application of this concept in several fields of economics, it is regarded as one of most valuable economic concept. Demand for a good is defined as the desire to get something as supported by the purchasing power. Quantity demand of a good is particular quantity bough at a particular price. Demand schedule on the other hand represent a table containing different figures for quantity demand each corresponds to a particular price. Demand schedule therefore represents a set of quantity demanded and price. Quantity demand is obtained for a single price. For obtaining a demand schedule, a set of price and quantity demanded is required. From the demand schedule, plotting different price and corresponding quantity demand curve for the good is derived. However, from a single quantity demanded it is not possible to obtain the demand curve. Demand curve shows the relation between price and quantity demanded of a commodity. A change in price likely to affect the demand curve inversely. When price of a commodity increases, then it becomes costly to purchase the good. As a result, demand decreases. Conversely, when price decreases then cost of purchasing the commodity decreases. This leads to an increase in the quantity demanded. The change in demand due to change in price is captured by the movement along the demand curve. This is shown in panel (a) of figure 2. The demand curve is DD. When price is P1, then demand is Q1. Corresponding point on the demand curve is A. Now consider, a fall in price from P1 to P2. With a decrease in price quantity demanded increase from Q1 to Q2. Corresponding point on the demand curve shifts from A to B. In addition to price, demand of a commodity depends on a number of other factors such as income, taste and preferences, price of related goods and others. Change in any factor except price causes a shift in the demand curve. For example, when income increases then purchasing power also increases. This causes an outward shift in the demand curve. A decrease in income causes a leftward shift of the demand curve. Similarly, changes in taste and preferences or change in price of substitutes or complementary goods causes a shift in the demand curve. Demand captures willingness of the buyers to purchase a commodity. Supply measures the willingness of suppliers to supply the good. The two forces of demand and supply interact in the market and determine price and quantity. Equilibrium in the market occurs at a point where demand and supply matches. DD curve shows demand of commodity X. SS curve is the corresponding supply curve. Equilibrium point in the market is E. Corresponding to E, the equilibrium price is obtained as P* and equilibrium quantity is Q*. P1 is a price above the equilibrium price. At this price, quantity demand is Q1D and quantity supplied is Q1S. As the quantity supplied exceeds the quantity demanded an excess supply of (Q1S Q1D) is found to exist in the market. P2 is a price below the equilibrium price. At this price, Quantity demanded is Q2D and Quantity supplied is Q2S. Here, Quantity demanded exceeds the quantity supplied resulting in an excess demand of (Q2D Q2S). References Fine, B., 2016. Microeconomics.University of Chicago Press Economics Books. Mankiw, N.G., 2014.Principles of macroeconomics. Cengage Learning.