Is justified by the superiority of laissez faire over government intervention. Think about what life would be like without specialization. In our example, all three plants are equally good at snowboard production. b. The law of supply implies that: Production had plummeted by almost 30%. Intermediate goods; final goods and services C. Inefficient incentives d. Why she likes candy bars. Which of the following is an example of government failure? The negative slope of the production possibilities curve reflects the scarcity of the plants capital and labor. c. Decrease and the equilibrium quantity of ice cream to increase. b. d. A decrease in the supply of pens, If there are only two airlines that fly between Dallas and New Orleans, what will happen in the market for In that case, it produces no snowboards. Understanding this law can help you make decisions that lead to the highest returns for the business. The plant for which the opportunity cost of an additional snowboard is greatest is the plant with the steepest production possibilities curve; the plant for which the opportunity cost is lowest is the plant with the flattest production possibilities curve. Factors of production; final goods and services Here, an economy that can produce two categories of goods, security and all other goods and services, begins at point A on its production possibilities curve. a. So let's compare straight and curved frontier lines to . b. In drawing the production possibilities curve, we shall assume that the economy can produce only two goods and that the quantities of factors of production and the technology available to the economy are fixed. Notice that this curve is linear. Answer: The statement is: True. Opportunity cost is the trade-off that one makes when deciding between two options. Increasing opportunity cost is important in business and economics because it describes the danger of a complete shift into non-production. The related concept of marginal cost is the cost of producing one extra unit of something. Draw the production possibilities curve for Plant R. On a separate graph, draw the production possibilities curve for Plant S. Which plant has a comparative advantage in calculators? When the frontier line itself moves, economic growth is under way. c. Greater production of one good requires increasingly larger sacrifices of other goods. In applying the model, we assume that the economy can produce two goods, and we assume that technology and the factors of production available to the economy remain unchanged. According to the law of increasing opportunity cost, as a society produces more and more of a certain good, further production increases involve ever-greater opportunity costs. Economic Lowdown Video Series, economic education specialist Scott Wolla explains how the production possibilities frontier (PPF) illustrates some very important economic concepts. McNEESE State University Assig, Statistical Techniques in Business and Economics, Douglas A. Lind, Samuel A. Wathen, William G. Marchal, Fundamentals of Engineering Economic Analysis, David Besanko, Mark Shanley, Scott Schaefer. If an economy is fully utilizing its resources, it can produce more of one product only if it: According to the law of increasing opportunity costs, C. In order to produce additional units of a particular good, it is necessary for society to sacrifice increasingly larger amounts of alternative goods, If the United States decided to convert automobile factories to tank production, as it did during World War II, but finds that some auto manufacturing facilities are not well suited to tank production, then The PPF captures the concepts of scarcity, choice, and tradeoffs. ~produces ~trade-offs Further, the economy must make full use of its factors of production if it is to produce the goods and services it is capable of producing. smaller amounts (it is increasing at a decreasing rate). Between points A and B, for example, the slope equals 2 pairs of skis/snowboard (equals 100 pairs of skis/50 snowboards). Finished goods are bought and sold. Question: According to the law of increasing opportunity costs, A. Figure 2.9 Efficient Versus Inefficient Production. First, let's figure out the total number of each you can produce. A decrease in the price of perfume Putting its factors of production to work allows a move to the production possibilities curve, to a point such as A. We see in Figure 2.5 The Combined Production Possibilities Curve for Alpine Sports that, beginning at point A and producing only skis, Alpine Sports experiences higher and higher opportunity costs as it produces more snowboards. b. The opportunity cost of moving from . c. The allocation of resources by the market is likely to be the best possible, given scarce resources and income d. The market supply curve intersects the x-axis. A. an increase in the working-age population Profits Increasing the availability of these goods would improve the standard of living. d. Increasing opportunity costs will occur with greater tank production. constraints. Figure 2.3 The Slope of a Production Possibilities Curve. Increase and the equilibrium quantity of ice cream to increase. Notice that this production possibilities curve, which is made up of linear segments from each assembly plant, has a bowed-out shape; the absolute value of its slope increases as Alpine Sports produces more and more snowboards. Change in y coordinates between two points divided by the change in their x coordinates. Learn more about the Q&A Resources for Teachers and Students . The demand curve will shift to the right A decrease in tastes for perfume a. d. Factories are bought and sold. When an economy is producing efficiently it is: It illustrates the production possibilities model. How much she likes candy bars. c. Those goods and services with the lowest prices. Two years later she added a third plant in another town. The increase in resources devoted to security meant fewer other goods and services could be produced. Its downwards slope reflects scarcity. The production of both goods rises. With all three plants producing only snowboards, the firm is at point D on the combined production possibilities curve, producing 300 snowboards per month and no skis. D. producing equal amounts of all goods, B. The mix of output to be produced and the resources to be used in the production process. a. a. c. Want the goods and services the most. The Federal Reserve lowered interest rates at their last meeting. The decision to devote more resources to security and less to other goods and services represents the choice we discussed in the chapter introduction. c. Karl Marx. It need not imply that a particular plant is especially good at an activity. Because an economys production possibilities curve assumes the full use of the factors of production available to it, the failure to use some factors results in a level of production that lies inside the production possibilities curve. The economy had moved well within its production possibilities curve. What Is A Simple Definition Of Opportunity Cost? Plant 3 would be the last plant converted to ski production. . The governor of A downward shift of the supply curve. Factors of production are also known as resources If Econ Isle's production moved in the opposite direction, from all gadgets to all widgets, the law would still hold: As you increase the production of one good, the opportunity cost to produce the additional good increases. The greater the absolute value of the slope of the production possibilities curve, the greater the opportunity cost will be. b. h(u)=1uh(u)=\frac{1}{u} \quadh(u)=u1 over 2u42 \leq u \leq 42u4, (b) g(x)=1x4g(x)=\frac{1}{\sqrt{x-4}}g(x)=x41, (c) h(x)=(x3)(5x)h(x)=\sqrt{(x-3)(5-x)}h(x)=(x3)(5x). The goal of the consumer in a market economy is to use his/her limited income to buy: The law of increasing opportunity cost states that whenever the same resource allocation decision is made, the opportunity cost will increase. Increase and the equilibrium quantity of jelly to decrease. When devoted solely to snowboards, it produces 100 snowboards per month. Well, some resources are better suited for some tasks than others. By 1933, more than 25% of the nations workers had lost their jobs. a. In other words, opportunity cost subtracts the cost of the chosen outcome from the cost of the outcome that a company could have chosen. a. c. Final goods and services; factors of production The plant with the lowest opportunity cost of producing snowboards is Plant 3; its slope of 0.5 means that Ms. Ryder must give up half a pair of skis in that plant to produce an additional snowboard. a. Supply curves are upward-sloping to the right. That would bring ski production to 300 pairs, at point B. c. The market mechanism has failed to achieve social efficiency. We have already seen that an additional snowboard requires giving up two pairs of skis in Plant 1. c. Income d. Decrease and the equilibrium quantity of jelly to increase. a. That is because the resources transferred from the production of other goods and services to the production of security had a greater and greater comparative advantage in producing things other than security. An economy cannot operate on its production possibilities curve unless it has full employment. The economy's capital stock declines Of course, an economy cannot really produce security; it can only attempt to provide it. b. b. b. d. The supply of cancer-treating curves will increase. A change in demand means there has been a shift in the demand curve, and a change in quantity demanded: C. A line that curves outward when resources are perfectly adaptable in the production of different goods Producing a combination of goods and services beyond the production-possibilities curve. It suggests that to obtain efficiency in production, factors of production should be allocated on the basis of comparative advantage. b. Greed. b. Producing more snowboards requires shifting resources out of ski production and thus producing fewer skis. These intercepts tell us the maximum number of pairs of skis each plant can produce. Notice the curve still has a bowed-out shape; it still has a negative slope. More people will be able to purchase building materials Economists often use models such as the production possibilities model with graphs that show the general shapes of curves but that do not include specific numbers. Since we have assumed that the economy has a fixed quantity of available resources, the increased use of resources for security and national defense necessarily reduces the number of resources available for the production of other goods and services. As we include more and more production units, the curve will become smoother and smoother. Required use of pollution-control technology that is obsolete To see this relationship more clearly, examine Figure 2.3 The Slope of a Production Possibilities Curve. The opportunity cost of an additional snowboard at each plant equals the absolute values of these slopes (that is, the number of pairs of skis that must be given up per snowboard). c. Decrease and the equilibrium quantity of jelly to decrease. a. The opportunity cost of skis at Plant 2 is 1 snowboard per pair of skis. The economy produces SA units of security and OA units of all other goods and services per period. Plant 3s comparative advantage in snowboard production makes a crucial point about the nature of comparative advantage. Increasing the. That was a loss, measured in todays dollars, of well over $3 trillion. d. All of the choices. b. A production possibilities curve is a graphical representation of the alternative combinations of goods and services an economy can produce. The largest IT transaction of the quarter was EMC's $625\$ 625$625 million acquisition of VMWare. If it chooses to produce at point A, for example, it can produce FA units of food and CA units of clothing. 2.3 Applications of the Production Possibilities Model, 4.2 Government Intervention in Market Prices: Price Floors and Price Ceilings, 5.2 Responsiveness of Demand to Other Factors, 7.3 Indifference Curve Analysis: An Alternative Approach to Understanding Consumer Choice, 8.1 Production Choices and Costs: The Short Run, 8.2 Production Choices and Costs: The Long Run, 9.2 Output Determination in the Short Run, 11.1 Monopolistic Competition: Competition Among Many, 11.2 Oligopoly: Competition Among the Few, 11.3 Extensions of Imperfect Competition: Advertising and Price Discrimination, 14.1 Price-Setting Buyers: The Case of Monopsony, 15.1 The Role of Government in a Market Economy, 16.1 Antitrust Laws and Their Interpretation, 16.2 Antitrust and Competitiveness in a Global Economy, 16.3 Regulation: Protecting People from the Market, 18.1 Maximizing the Net Benefits of Pollution, 20.1 Growth of Real GDP and Business Cycles, 22.2 Aggregate Demand and Aggregate Supply: The Long Run and the Short Run, 22.3 Recessionary and Inflationary Gaps and Long-Run Macroeconomic Equilibrium, 23.2 Growth and the Long-Run Aggregate Supply Curve, 24.2 The Banking System and Money Creation, 25.1 The Bond and Foreign Exchange Markets, 25.2 Demand, Supply, and Equilibrium in the Money Market, 26.1 Monetary Policy in the United States, 26.2 Problems and Controversies of Monetary Policy, 26.3 Monetary Policy and the Equation of Exchange, 27.2 The Use of Fiscal Policy to Stabilize the Economy, 28.1 Determining the Level of Consumption, 28.3 Aggregate Expenditures and Aggregate Demand, 30.1 The International Sector: An Introduction, 31.2 Explaining InflationUnemployment Relationships, 31.3 Inflation and Unemployment in the Long Run, 32.1 The Great Depression and Keynesian Economics, 32.2 Keynesian Economics in the 1960s and 1970s, 32.3. d. There will be a movement to the left along the initial demand curve. c. Increase and quantity to increase. Airports around the world hired additional agents to inspect luggage and passengers. The Great Depression was a costly experience indeed. a. This point shows widget production increased by 2, and this by 2 more, and this by 2 more, indicating all widgets and no gadgets. At point A, the economy was producing SA units of security on the vertical axisdefense services and various forms of police protectionand OA units of other goods and services on the horizontal axis. B. the production possibilities curve between tanks and auto mobiles will shift outward Instead of the bowed-out production possibilities curve ABCD, we get a bowed-in curve, ABCD. An economys factors of production are scarce; they cannot produce an unlimited quantity of goods and services. C Getting the most goods and services from the available resources, Which of the following will cause the production possibilities curve to shift inward? Find limnSL\lim _{n \rightarrow \infty} S_LlimnSL and limnSR\lim _{n \rightarrow \infty} S_RlimnSR. This production possibilities curve includes 10 linear segments and is almost a smooth curve. b. As the law says, as you increase the production of one good, the opportunity cost to produce the additional good increases. If the firm were to produce 100 snowboards at Plant 3, ski production would fall by 50 pairs per month (recall that the opportunity cost per snowboard at Plant 3 is half a pair of skis). Hong Kong, with its huge population and tiny endowment of land, allocates virtually none of its land to agricultural use; that option would be too costly. The Production Possibilities Frontier (PPF) is a graph that shows all the different combinations of output of two goods that can be produced using available resources and technology. The exhibit gives the slopes of the production possibilities curves for each of the firms three plants. b. The law of increasing opportunity cost holds that as an economy moves along its production possibilities curve in the direction of producing more of a particular good, the opportunity cost of additional units of that good will increase. When a surplus exists for a product: Created by Sal Khan. She added a second plant in a nearby town. d. Every market transaction involves an exchange of dollars for goods or resources. a. In material terms, the forgone output represented a greater cost than the United States would ultimately spend in World War II. a. In 2008 the same company sold 40,000 MP3 In other words, the opportunity cost of producing 2 widgets is now 6 gadgets. So let's compare straight and curved frontier lines to better understand what is more likely to happen when production changes. Workers, for example, specialize in particular fields in which they have a comparative advantage. Government laws and regulations a. We will see in the chapter on demand and supply how choices about what to produce are made in the marketplace. The production possibilities curve shown suggests an economy that can produce two goods, food and clothing. a. Could it still operate inside its production possibilities curve? The major traceable reason for this is inefficiency in resource reallocation. perfume? Production totals 350 pairs of skis per month and zero snowboards. Required use of pollution control technology that is obsolete d. A change in a determinant of demand shifts the supply curve. b. Our final lesson focuses on the shape of the frontier line. Currently, employees in the U.S rely mainly on the employers who offer the wages, salaries and benefits, such as retirement, paid leaves and health insurance as an addition to the total package of compensation (Carraher, 2011). c. Eliminates market failures created by government. Increasing the production of a particular good will cause the price of the good to remain constant. This production possibilities curve shows an economy that produces only skis and snowboards. The result is the bowed-in curve ABCD. How many calculators will it be able to produce? b. d. The public's welfare. The absolute value of the slope of any production possibilities curve equals the opportunity cost of an additional unit of the good on the horizontal axis. a. In other words, the opportunity cost of producing 2 widgets is 2 gadgets. b. It is hard to imagine that most of us could even survive in such a setting. will cause the equilibrium price for jelly to: A decrease in the supply of airline tickets. Both the price and quantity increase Now consider what would happen if Ms. Ryder decided to produce 1 more snowboard per month. Need the goods and services the most. The law also applies as the firm shifts from snowboards to skis. A decrease in the demand for corn syrup. Many countries, for example, chose to move along their respective production possibilities curves to produce more security and national defense and less of all other goods in the wake of 9/11. b. Florida places a price ceiling on all building materials to keep the prices reasonable. c. Technology is lost Now suppose the firm decides to produce 100 snowboards. d. The government is allocating resources inefficiently. At this point, Econ Isle can produce 10 gadgets and 2 widgets. There, 50 pairs of skis could be produced per month at a cost of 100 snowboards, or an opportunity cost of 2 snowboards per pair of skis. d. There is a surplus of the good. Two things could leave an economy operating at a point inside its production possibilities curve. c. The changing relationship between the two variables. A linear function can be distinguished by: A. the production possibilities curve between tanks and automobiles will appear as a straight line Explain the concept of the production possibilities curve and understand the implications of its downward slope and bowed-out shape. d. No change in the supply of or demand for airline tickets because the price is not changing right now. Ceteris paribus, which of the following is most likely to cause an increase in the quantity demanded of If market signals result in pollution beyond the optimal level then: b. c. Potential output. The example of choosing between catching rabbits and gathering berries illustrates how opportunity cost works. a. As a result, producing the good is associated with greater and greater -. C. c. Higher equilibrium price. The exhibit gives the slopes of the production possibilities curves for each plant. b. In 2007 a company sold 35,000 MP3 players at $150 each. c. The market demand curve intersects the y-axis. d. People begin to retire at earlier ages, Which of the following will cause the production-possibilities curve to shift inward? c. Shortages of building materials and a slower recovery from the storm Greater production of one good requires increasingly larger sacrifices of other goods. Greater regulation to correct the imbalances in the economy, as well government intervention to maintain full d. Supply because of a change in a non-price determinant. b. a. a person who earns a lot of money as a singer or dancer b. a person who creates a game and sells it to a game manufacturer c. a person who starts an all-organic cleaning supplies business that employs others d. a person who works as a highly-paid computer programmer The goods and services that maximize profits for businesses. Neither skis nor snowboards is an independent or a dependent variable in the production possibilities model; we can assign either one to the vertical or to the horizontal axis. 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