SprinterJr
May 10, 2008, 06:11 PM
I have difficulty undrstanding the statement - "when the price of X in terms of Y is greater than the opportunity cost of Y, we are paying more than it really cost to produce X. In such a case we may say that the economy is inefficient."(Witztum. A, 2005)
This statement was made in relation to a linear PPF, where 100 units of labour was available that can produce either 100 units of good X or 200 units of good Y and of course any feasible combinations of both. There was a point A on the PPF of coordinates (25,150), which represents a productively efficient point and a point B under the PPF of coordinates (25,100) which represents an productively inefficient point. I know that the opportunity cost of X is 2 units of Y and that the opportunity cost of Y is 1/2 unit of X.
My problem come from understanding the price of X in term of Y and the concept of paying more than it really cost to produce X.
Can someone please help me to understand this important concept. Thanks for the help.
This statement was made in relation to a linear PPF, where 100 units of labour was available that can produce either 100 units of good X or 200 units of good Y and of course any feasible combinations of both. There was a point A on the PPF of coordinates (25,150), which represents a productively efficient point and a point B under the PPF of coordinates (25,100) which represents an productively inefficient point. I know that the opportunity cost of X is 2 units of Y and that the opportunity cost of Y is 1/2 unit of X.
My problem come from understanding the price of X in term of Y and the concept of paying more than it really cost to produce X.
Can someone please help me to understand this important concept. Thanks for the help.