Micro Assignment Example | Topics and Well Written Essays - 1000 words

Micro - Assignment Example According to Samuelson and Temin the opportunity cost of a choice is determined by the next best choice, and for many allocations, opportunity cost is measured by monetary value (Samuelson and Temin, 1976, p.20). Hubbard and Brien write that choices are costly thus the need for an alternative that will incorporate the scarce resources (Hubbard and Brien, 2006, p.8). Choices have both the implicit and explicit. Explicit costs are which monetary value is lost i.e. the sacrifice of the choice is paid out in monetary value. On the other hand, implicit costs are costs for which there is no monetary value in the choice made. The principal forfeit in this cost is time. According to Douglas the cost of production of any product is estimated in terms of what is foregone (Douglas, 1994, p.171). The concept of opportunity cost is best illustrated by production possibility frontiers. A PPF demonstrates the probable combination of two products e.g. let us consider a firm in UK producing computers and mobile phones. When it uses all its resources, it can produce 6.8 million computers and 50 million mobile phones. Computer (m) Mobile Phones (m) 84 0 80 1 70 3 60 5 50 6.8 40 8.2 35 8.8 20 10 5 11 Production Possibility Frontier Opportunity cost will lead to trade off in the choices of consumers and a comparative advantage in countries. A trade off entails a forfeit made to obtain a certain good. The output increases when countries specialize in the goods and services they have absolute advantage. For example let us consider UK and country B-producing motor cars and trucks. Maximum production Max Output U.K. Country B Cars 60 45 Truck 40 20 Employing all the resources U.K. can produce 60 million cars and 25 million trucks, while country B can produce 45 million cars and 20 million trucks. It is therefore right to say that U.K. has an absolute advantage in producing both goods, but it has comparative advantage in producing trucks since it is 2 times better at producing them than country B, whereas it is 1.3 times better in producing cars. The concept of opportunity comes in production of products by countries. Countries that produce goods using few resources at low opportunity cost have a high comparative advantage in producing those goods. However, comparative advantage ignores costs and assumes there are no diminishing returns (Hubbard, p.101). Effect of change in price of disposable hospital gowns in U.K Change in demand Price P=p* p=p1 DD 2 DD 1 output A decrease in the price of disposable hospital gown in the United Kingdom results to an increase in demand from DD 1 to DD 2. Supply remains the same in this case. Change in demand and supply due to change in market SS 1 p SS 2 P=p* DD 2 DD 1 Y1 Y2 Y3 Quantity A change in the price of hospital gowns will result to an increase in demand. An increase in demand results to more production as firms try to meet the increased demand. This result to change in the equilibrium price (McGraw-Hill, p.58). Market equ ilibrium shows the relationship between market demand and market supply. There is competitive and Nash equilibrium. Profit is the variation between revenue and costs. In economics profit denoted as П is the differentiation of marginal revenue and marginal cost i.e. П = TR-TC. High revenues translate to high profits if the production cost is low. Usually a company tries to maximize profits