Question

Applying Economic Concepts Explain why, in an economy that produces only fish and computers and is working at efficiency, the 500 th computer made will cost more in terms of fish than the 450th computer made.

Short answer

Producing additional computers increases the fish cost due to the law of increasing opportunity costs.

Step-by-step solution

Understand the Production Possibility Frontier (PPF)

In an economy producing only fish and computers, efficiency refers to operating on the production possibility frontier (PPF). The PPF represents different combinations of output that can be achieved given finite resources, illustrating the trade-offs between producing one good over another.

Concept of Opportunity Cost

The opportunity cost is what you give up when making an economic choice. Here, it refers to the amount of fish that must be sacrificed to produce more computers. It typically increases due to the law of increasing opportunity cost, which is relevant when resources are not equally good at producing both goods.

Applying the Law of Increasing Opportunity Costs

According to this law, as more of one good (computers) is produced, resources less suited to its production are used, making each additional unit more costly in terms of the other good (fish). This implies that producing the 500th computer requires sacrificing more fish than producing the 450th computer.

Key concepts

Understanding Opportunity Cost

In everyday life, making choices often involves a trade-off. When we decide to do one thing, we usually give up the opportunity to do something else. This is the core idea of opportunity cost.
For example, if an economy primarily produces fish and computers, producing more computers might mean catching fewer fish. Opportunity cost measures what is forgone, in this case, the fish that are sacrificed to make more computers.
The concept arises because resources are limited, and choosing one path means giving up others. Economists use opportunity cost to ensure that the benefits of a choice are greater than the costs associated with it.

• Opportunity cost is not just about money, but about time, effort, or other sacrifices needed to make a choice.
• Understanding opportunity costs helps in making better decisions based on what must be given up to achieve something else.

Exploring the Law of Increasing Opportunity Costs

As production of one good increases, the resources that are less adaptable or less efficient for producing that good begin to be used. This is known as the law of increasing opportunity costs.
In our scenario, when producing more computers, resources initially allocated to fishing are now redirected. However, not all resources are equally efficient in producing computers. As a result, the cost in terms of sacrificed fish will increase.
This explains why the 500th computer costs more fish than the 450th. Resources best suited for making computers are used first. As those resources become scarce, less-suited resources lead to higher opportunity costs.

• Each additional unit of a good requires reallocating resources less suited for its production.
• This results in increasing opportunity costs as more of that good is produced.

The Role of Trade-Offs in Production

Trade-offs are at the heart of decision-making in economics, particularly when resources are scarce. They illustrate the necessity of choosing between two competing alternatives.
In the context of our fish and computers production, the trade-off comes into play wherein producing more computers means producing fewer fish, and vice versa. This is due to the limited nature of resources available for production.
A production possibility frontier (PPF) helps visualize these trade-offs by showing the maximum feasible amount of two goods that can be produced with available resources. When the economy operates on the PPF, it showcases efficient use of resources and highlights the trade-offs between different production combinations.

• Trade-offs require weighing the benefits of producing one more unit of a good against the cost of what is given up.
• They provide a clear picture of the limitations and choices faced by an economy.