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BUS 731 GLOBAL ECONOMICS & BUSINESS INITIATIVES
Professor: Omar Amreen
Nikon Patel
March 8, 2021
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A
Production possibility frontier indicates that there are different combinations of quantities of
2 goods, bananas and apples produced by given resources of home economy. Here home has
1200 labor units where they are used fully to create only apples that will create 400 apples
𝑡𝑜𝑡𝑎𝑙 𝑢𝑛𝑖𝑡𝑠 𝑜𝑓 𝑙𝑎𝑏𝑜𝑟 𝑎𝑡 𝐻𝑜𝑚𝑒
𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑚𝑒𝑛𝑡 𝑜𝑓 𝑢𝑛𝑖𝑡 𝑙𝑎𝑏𝑜𝑟 𝑤ℎ𝑒𝑛 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑜𝑓 𝑎𝑝𝑝𝑙𝑒
= 1200/3
So there is a combination of 400 apples and 0 bananas in representing vertical axis as A point
So it is also same with finding labor units in producing bananas where Home will be
producing 600 bananas
𝑡𝑜𝑡𝑎𝑙 𝑢𝑛𝑖𝑡𝑠 𝑜𝑓 𝑙𝑎𝑏𝑜𝑟 𝑎𝑡 𝐻𝑜𝑚𝑒
𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑚𝑒𝑛𝑡 𝑜𝑓 𝑢𝑛𝑖𝑡 𝑙𝑎𝑏𝑜𝑟 𝑤ℎ𝑒𝑛 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑜𝑓 𝑏𝑎𝑛𝑎𝑛𝑎𝑠
= 1200/2
So this combination of 600 bananas and 0 apples that are indicated on horizontal axis and B
point as intercept (Luttrell et al., 2018).
Now production possibility frontier of Home is developed when joining horizontal intercept
A and vertical intercept B as shown below
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PPF for Home bananas and apple production
B
Opportunity cost of a particular item or product is value of foregone for a alternative product
and in this activity, it is defined as unit labor required in apple production and economy it
would need to give up so that banana can be produced extra. This unit labor required in apple
production is 3and banana is at 2 (Taylor et al., 2006).
Now opportunity cost of apple in regards to banana are
𝑢𝑛𝑖𝑡 𝑙𝑎𝑏𝑜𝑟 𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑖𝑛 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑜𝑓 𝑎𝑝𝑝𝑙𝑒
= 𝑢𝑛𝑖𝑡 𝑙𝑎𝑏𝑜𝑟 𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑖𝑛 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑜𝑓 𝑏𝑎𝑛𝑎𝑛𝑎 = 3/2 or 1.5
So it is observed that economy avoiding to produce apples at that time, labor is used in
producing 1.5 bananas
C
In absence of international trade, Home wants to produce goods for self-sufficiency and
Home can produce both bananas and apples only when their relative price of apple and
bananas is same as its opportunity costs. Besides opportunity costs are same as ratio of labor
of unit required in apples and bananas and relative price of goods are same to relative labor
unit requirements. So it is assumed that labor is only factor of production, mobility of free
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labor in factor market and perfect competition in market. Labor mobility will make sure that
common wage in every section and competition will make sure that goods price is same as
cost of labor involved with production (Vivien Lefebvre, 2020).
So relative price of apple in terms of bananas = relative cost of labor of production =
=
𝑤𝑎𝑔𝑒∗𝑢𝑛𝑖𝑡 𝑙𝑎𝑏𝑜𝑟 𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑓𝑜𝑟 𝑎𝑝𝑝𝑙𝑒𝑠
𝑤𝑎𝑔𝑒∗𝑢𝑛𝑖𝑡 𝑙𝑎𝑏𝑜𝑟 𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑓𝑜𝑟 𝑏𝑎𝑛𝑎𝑛𝑎𝑠
= 3/2
Reference
Holger Preuss (2009) Opportunity costs and efficiency of investments in mega sport
events, Journal of Policy Research in Tourism, Leisure and Events, 1:2, 131140, DOI: 10.1080/19407960902992183
Luttrell, C., Sills, E., Aryani, R. et al. Beyond opportunity costs: who bears the implementation
costs of reducing emissions from deforestation and degradation?. Mitig Adapt Strateg
Glob Change 23, 291–310 (2018). https://doi.org/10.1007/s11027-016-9736-6
Taylor, S., Fender, B., & Burke, K. (2006). Unraveling the Academic Productivity of Economists:
The Opportunity Costs of Teaching and Service. Southern Economic Journal, 72(4), 846859. doi:10.2307/20111856
Vivien Lefebvre (2020) Performance, working capital management, and the liability of
smallness:
A
question
of
opportunity
costs?, Journal
Management, DOI: 10.1080/00472778.2020.1735252
of
Small
Business