4. Improvement in Technology and Increase in the Amount of Resources: If new resources are available or
if the level of technology is improved (e.g., application of high-yielding varieties of seeds, better methods
of cultivation, better irrigational facilities, etc.) then the whole production possibility curve will shift outward.
This is shown by P1P’2 curve in Fig. 1.1. In that case, the country can produce more of both X and Y
commodities.
OPPORTUNITY COST
Opportunity cost is the value of alternative foregone in order to have something else. This value is unique for
each individual. You may, for instance, forgo ice cream in order to have mashed potatoes. For you, the
mashed potatoes have a greater value than dessert. But you can always change your mind in the future
because there may be some instances when the mashed potatoes are just not as attractive as the ice cream.
The opportunity cost of an individual’s decisions, therefore, is determined by his or her needs, wants, time
and resources (income).
This is important to the production possibility curve/ production frontier because a country will decide how to
best allocate its resources according to its opportunity cost. Therefore, if the country chooses to produce more
wine than cotton, the opportunity cost is equivalent to the cost of giving up the required cotton production.
Let’s look at another example to demonstrate how opportunity cost ensures that an individual will buy the less
expensive of two similar goods when given the choice. For example, assume that an individual has a choice
between two telephone services. If he or she were to buy the most expensive service, that individual may have
to reduce the number of times he or she goes to the movies each month. Giving up these opportunities to go to
the movies may be a cost that is too high for this person, leading him or her to choose the less expensive
service.
Remember that opportunity cost is different for each individual and nation. Thus, what is valued more than
something else will vary among people and countries when decisions are made about how to allocate
resources.
WORKING OF AN ECONOMIC SYSTEM
An economic system is an entire set of arrangements and institutions meant for meeting the two-fold objectives
of a society:
– increasing the availability of resources
– ensuring the economic use
It is well known that economic systems, as created by different societies differ from each other, the economic
system of even a given society keeps evolving and changing overtime, partly on account of ongoing efforts of
the society to meet the problem of the scarcity of resources. Broadly speaking, types of economic systems are
based upon per capita income, prioritization of individuals to spend their resources and scarcity of both income
and resources. The best possible solution to these three potential problems is the basis of a successful economic
system. Precedence set by society, its individuals and the government for the attainment of resource mobility
and individual freedom is fundamental to the right choice of system for any society. There are three different
types of economic system.
– Capitalist Economy
– Socialist Economy
– Mixed Economy
if the level of technology is improved (e.g., application of high-yielding varieties of seeds, better methods
of cultivation, better irrigational facilities, etc.) then the whole production possibility curve will shift outward.
This is shown by P1P’2 curve in Fig. 1.1. In that case, the country can produce more of both X and Y
commodities.
OPPORTUNITY COST
Opportunity cost is the value of alternative foregone in order to have something else. This value is unique for
each individual. You may, for instance, forgo ice cream in order to have mashed potatoes. For you, the
mashed potatoes have a greater value than dessert. But you can always change your mind in the future
because there may be some instances when the mashed potatoes are just not as attractive as the ice cream.
The opportunity cost of an individual’s decisions, therefore, is determined by his or her needs, wants, time
and resources (income).
This is important to the production possibility curve/ production frontier because a country will decide how to
best allocate its resources according to its opportunity cost. Therefore, if the country chooses to produce more
wine than cotton, the opportunity cost is equivalent to the cost of giving up the required cotton production.
Let’s look at another example to demonstrate how opportunity cost ensures that an individual will buy the less
expensive of two similar goods when given the choice. For example, assume that an individual has a choice
between two telephone services. If he or she were to buy the most expensive service, that individual may have
to reduce the number of times he or she goes to the movies each month. Giving up these opportunities to go to
the movies may be a cost that is too high for this person, leading him or her to choose the less expensive
service.
Remember that opportunity cost is different for each individual and nation. Thus, what is valued more than
something else will vary among people and countries when decisions are made about how to allocate
resources.
WORKING OF AN ECONOMIC SYSTEM
An economic system is an entire set of arrangements and institutions meant for meeting the two-fold objectives
of a society:
– increasing the availability of resources
– ensuring the economic use
It is well known that economic systems, as created by different societies differ from each other, the economic
system of even a given society keeps evolving and changing overtime, partly on account of ongoing efforts of
the society to meet the problem of the scarcity of resources. Broadly speaking, types of economic systems are
based upon per capita income, prioritization of individuals to spend their resources and scarcity of both income
and resources. The best possible solution to these three potential problems is the basis of a successful economic
system. Precedence set by society, its individuals and the government for the attainment of resource mobility
and individual freedom is fundamental to the right choice of system for any society. There are three different
types of economic system.
– Capitalist Economy
– Socialist Economy
– Mixed Economy
