Wednesday, 16 March 2011

TO FACE A TRADE -OFF!

Presently reading an interesting book by Laurence .S. Seidman ISBN 0-7656-1109-0...
He has explained Trade-off with the help of economic parables!He writes Adam and Eve  were happy initially consuming all that they produced
(i.e.ploughed,planted and harvested) with their bare hands ,weather and soil never failed them !
      Adam dreams of a tractor,(fertile imagination of his leaped centuries!)He saw the possibility of their ability to plough,plant and harvest multiply .Fervently he started praying for a tractor. God answered his prayers by burning detailed instructions onto a tablet of stone that lay at the foot of the tree of economic knowledge.
    As both set out to making a tractor they realised that they were unable to devote as much time as they were doing earlier for ploughing,planting and harvesting food .
  Eve reasoned ..."We face a trade-off"They had to sacrifice consumption of the present ,while they built the tractor in order to enjoy more consumption in the future. 
Adam wanted to understand it pictorially .
Eve drew a figure with a stick that resembles the present day PRODUCTION POSSIBILITY CURVE that  explains trade-off between 2 goods or services .In their case various production possibilities  
A  production possibility if they devoted all their time to  producing food then  of 100  units of food no tractor, ....
B possibility of say producing 1 tractors and 60 units of food 
C production possibility ....of say producing 2 tractors and 20 units of food....

Here the cost of building a tractor would be 40 units of food!

Now we can define production possibility curve (P.P.C)It shows all possible combination of 2 goods that an economy can produce with the given resources and given technology.
  

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