Introduction to Microeconomics Test - 9

Production, consumption  and  capital formation  are called the basic economic activities of an economy. Scarce resources are used in the  production  of goods and services with the objective of satisfying our needs and wants.

The most common reason a PPF would shift is because of a change in technology, or because of economic growth.

The production possibility curve shows the maximum output combination of two goods and services that an economy can produce with all resources fully employed.

When there is improve in technology of X commodity it will rotate to right and if there is degradation in technology of X it will rotate left, here we assume that technolgy of Y remains constant.

Marginal opportunity cost is defined as the amount of one good that needs to be given up in order to increase the production of the other good by one unit. It is calculated as Units of good one sacrificed/ units of the other good obtained.

A PPC curve can be a straight line only if the marginal rate of transformation is constant throughout the curve. A MRT can remain constant only if both the commodities are equally constant and marginal utility derived from their production is also constant.

Factors such as labor, capital and technology, among others, will affect the resources available, which will dictate where the production possibility frontier lies. The PPF is also known as the production possibility curve or the transformation curve.

Positive economics is the study of economics  based on objective analysis. Most economists  today focus on positive economic analysis, which uses what is and what has been occurring in an economy as the basis for any statement about the future.

Normative economics is a perspective on economics that reflects normative judgments or opinionated reactions toward economic projects, statements, and scenarios. Unlike positive economics, normative economics heavily concerns itself with value judgments and theoretical scenarios and economic statements that present "what ought to be "rather than facts and cause-and-effect statements.

Marginal opportunity cost  is an economic term that analyzes the effect of producing additional units of a product on the  costs  of a business, as well as the opportunities the companies give up to produce more of a product.

Opportunity cost  refers to a benefit that a person could have received, but gave up, to take another course of action. Stated differently, an  opportunity cost  represents an alternative given up when a decision is made. This  cost  is, therefore, most relevant for two mutually exclusive events.

The marginal rate of transformation can be defined as how many units of good x have to stop being produced in order to produce an extra unit of good y, while keeping constant the use of production factors and the technology being used.

MOC refers to the number of units of a commodity sacrificed to gain one additional unit of another commodity. In case of PPF, MOC is always increasing, i.e. more and more units of a commodity have to be sacrificed to gain an additional unit of another commodity.PPF is concave shaped because of increasing marginal opportunity costs, i.e. more and more units of one commodity are sacrificed to gain an additional unit of another commodity.

PC can be convex to origin if MOC is decreasing, i.e. less and less unites of a commodity are sacrificed for gain of one additional unit.

The slope of the curve at any point represents the ratio of the marginal opportunity costs of the two commodities. That is, the marginal opportunity cost of an extra unit of one commodity is the necessary reduction in the output of the other.