(a) Marginal Opportunity Cost. MOC of a particular good (say wheat) along a PP curve is the amount of the other good (say tanks) which is sacrificed to produce an additional unit of that particular good. The rate of this sacrifice is called marginal opportunity cost of the expanding good. Rate of sacrifice is technically termed as marginal rate of transformation (MRT).
MRT is the ratio of units of one good (say, tanks) that needs to be sacrificed to produce one more unit of the other good (say, wheat). Symbolically :
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MARGINAL OPPORTUNITY COST / MRT SCHEDULE
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Production Possibilities (or combinations)
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Wheat (W) (lakh tons)
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Tanks (T) (thousands)
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MOC of wheat (in thousand tanks)
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A
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0
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15
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—
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—
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|
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B
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1
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14
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1·(= 15 - 14)
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1W : 1T
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|
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C
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2
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12
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2·(= 14 - 12)
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1W : 2T
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D
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3
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09
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3·(= 12 - 9)
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1W : 3T
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E
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4
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05
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4·(= 9 - 5)
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1W : 4T
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|
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F
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5
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00
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5·(= 5 - 0)
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1W : 5T
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A close look at the above table reveals that as production of wheat is increased, its marginal opportunity cost (MOC) in terms of tanks goes on increasing, i.e., MRT is rising. For example, when society moves from combination A to B, it sacrifices 1 (= 15 - 14) thousand tanks to produce 1 (= 1 - 0) lakh ton of wheat. Thus MOC of 1 lakh ton of wheat is 1 thousand tanks in the beginning, i.e., MRT = 1 : 1. Likewise in combinations C, D, E and F, MOC of producing 1 lakh ton of additional wheat is 2 (= 14 -12) thousand, 3(= 12 - 9) thousand, 4(= 9 - 5) thousand and 5(= 5 - 0) thousand tanks respectively. In short for every unit increase in production of wheat, more and more tanks are to be sacrificed, i.e., marginal opportunity cost, i.e., MRT goes on increasing. But why does MOC increase? Following are its two main reasons.
(b) Reasons for increasing marginal opportunity cost (or MRT)
(i) Operation of law of diminishing returns (or increasing cost). According to this law, if more and more units of a good are to be produced, the additional units will require more and more of factors units, i.e., cost of production of additional units of the good will increase.
(ii) Transferring resources from more productive to less productive uses. Various resources are specialised in production of different goods. When factors (resources) which are specialised for production of a particular good (say, workers manufacturing tanks) are transferred to the production of another good (say, production of wheat) for which they are less productive, some productivity is lost. Therefore, more of such resources (say workers) are needed to produce an additional unit of other good. This implies increase in marginal opportunity cost making the PP curve concave in shape.
Gaurav Seth 5 years, 11 months ago
(a) Marginal Opportunity Cost. MOC of a particular good (say wheat) along a PP curve is the amount of the other good (say tanks) which is sacrificed to produce an additional unit of that particular good. The rate of this sacrifice is called marginal opportunity cost of the expanding good. Rate of sacrifice is technically termed as marginal rate of transformation (MRT).
MRT is the ratio of units of one good (say, tanks) that needs to be sacrificed to produce one more unit of the other good (say, wheat). Symbolically :
MARGINAL OPPORTUNITY COST / MRT SCHEDULE
Production Possibilities (or combinations)
Wheat (W) (lakh tons)
Tanks (T) (thousands)
MOC of wheat (in thousand tanks)
A
0
15
—
—
B
1
14
1·(= 15 - 14)
1W : 1T
C
2
12
2·(= 14 - 12)
1W : 2T
D
3
09
3·(= 12 - 9)
1W : 3T
E
4
05
4·(= 9 - 5)
1W : 4T
F
5
00
5·(= 5 - 0)
1W : 5T
A close look at the above table reveals that as production of wheat is increased, its marginal opportunity cost (MOC) in terms of tanks goes on increasing, i.e., MRT is rising. For example, when society moves from combination A to B, it sacrifices 1 (= 15 - 14) thousand tanks to produce 1 (= 1 - 0) lakh ton of wheat. Thus MOC of 1 lakh ton of wheat is 1 thousand tanks in the beginning, i.e., MRT = 1 : 1. Likewise in combinations C, D, E and F, MOC of producing 1 lakh ton of additional wheat is 2 (= 14 -12) thousand, 3(= 12 - 9) thousand, 4(= 9 - 5) thousand and 5(= 5 - 0) thousand tanks respectively. In short for every unit increase in production of wheat, more and more tanks are to be sacrificed, i.e., marginal opportunity cost, i.e., MRT goes on increasing. But why does MOC increase? Following are its two main reasons.
(b) Reasons for increasing marginal opportunity cost (or MRT)
(i) Operation of law of diminishing returns (or increasing cost). According to this law, if more and more units of a good are to be produced, the additional units will require more and more of factors units, i.e., cost of production of additional units of the good will increase.
(ii) Transferring resources from more productive to less productive uses. Various resources are specialised in production of different goods. When factors (resources) which are specialised for production of a particular good (say, workers manufacturing tanks) are transferred to the production of another good (say, production of wheat) for which they are less productive, some productivity is lost. Therefore, more of such resources (say workers) are needed to produce an additional unit of other good. This implies increase in marginal opportunity cost making the PP curve concave in shape.
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