We can use the production possibilities model to examine choices in the production of goods and services. Law of Increasing Costs Which of the following people is an entrepreneur? If EMC's estimated opportunity cost of funds is 999 percent, as an analyst, how would you view the acquisition? The supply curve for monkey wrenches will shift to the left. 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. This occurs because the producer reallocates resources to make that product. If all the factors of production that are available for use under current market conditions are being utilized, the economy has achieved full employment. There are always participants in the market that are more efficient than you are in production. Change in y coordinates between two points divided by the change in their x coordinates. Plant 3 would be the last plant converted to ski production. In the wake of the 9/11 attacks in 2001, nations throughout the world increased their spending for national security. b. The continuous change in its slope. Instead of the bowed-out production possibilities curve ABCD, we get a bowed-in curve, ABCD. Results from a change in price of other goods. In other words, the more gadgets Econ Isle decides to produce, the greater its opportunity cost in terms of widgets. Alpine thus gives up fewer skis when it produces snowboards in Plant 3. . c. Equilibrium quantity. b. A. d. Are willing to pay the highest price. will cause the equilibrium price for jelly to: The demand for MP3 players increased from 2007 to 2008. 6*20 = 120 lbs of candy per day. 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. Scarcity implies that a production possibilities curve is downward sloping; the law of increasing opportunity cost implies that it will be bowed out, or concave, in shape. a. John Maynard Keynes. b. d. Increasing opportunity costs will occur with greater tank production. c. Decreases as its price falls, ceteris paribus. This point remains the same. Among the compensation packages, 70% comprise of the employee wages. a. 1. While even smaller than the second plant, the third was primarily designed for snowboard production but could also produce skis. Suppose a hurricane hits Florida causing widespread damage to houses and businesses. d. Ronald Reagan. Actual output. Ceteris paribus, which of the following is most likely to cause an increase in the quantity demanded of 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. The Great Depression was a costly experience indeed. Assume that steel is used to produce monkey wrenches. 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. c. An increase in income Markets necessarily have a physical location. C. Experiencing decreasing opportunity costs But this time we'll consider opportunity cost that varies along the frontier. smaller amounts (it is increasing at a decreasing rate). Means a shortage or surplus will result from holding prices constant. We have seen the law of increasing opportunity cost at work traveling from point A toward point D on the production possibilities curve in Figure 2.5 The Combined Production Possibilities Curve for Alpine Sports. b. QUESTIONS TRUE OR FALSE: A community of woodworkers produces tables and chairs. A rightward shift in a demand curve and a rightward shift in a supply curve both result in a: First, remember that opportunity cost is the value of the next-best alternative when a decision is made; it's what is given up. b. c. Greater production of one good requires increasingly larger sacrifices of other goods. B. In turn, movement from a point of underemployment toward the frontier indicates economic expansion. The goal of the consumer in a market economy is to use his/her limited income to buy: Understand specialization and its relationship to the production possibilities model and comparative advantage. B. corn is likely to decrease as society . Notice that this curve is linear. When factors of production are allocated on a basis other than comparative advantage, the result is inefficient production. First, let's figure out the total number of each you can produce. Consumer tastes or preferences b. If there are idle or inefficiently allocated factors of production, the economy will operate inside the production possibilities curve. Second, it might not allocate resources on the basis of comparative advantage. Ceteris paribus, a decrease in the price of milk will cause the equilibrium price of ice cream to: We assume that the factors of production and technology available to each of the plants operated by Alpine Sports are unchanged. An Emerging Consensus: Macroeconomics for the Twenty-First Century, 33.1 The Nature and Challenge of Economic Development, 33.2 Population Growth and Economic Development, 34.1 The Theory and Practice of Socialism, 34.3 Economies in Transition: China and Russia, Appendix A.1: How to Construct and Interpret Graphs, Appendix A.2: Nonlinear Relationships and Graphs without Numbers, Appendix A.3: Using Graphs and Charts to Show Values of Variables, Appendix B: Extensions of the Aggregate Expenditures Model, Appendix B.2: The Aggregate Expenditures Model and Fiscal Policy. a. A linear function can be distinguished by: a. Increases as its price falls, ceteris paribus. Comparative advantage thus can stem from a lack of efficiency in the production of an alternative good rather than a special proficiency in the production of the first good. Points on the production possibilities curve thus satisfy two conditions: the economy is making full use of its factors of production, and it is making efficient use of its factors of production. The table shows the combinations of pairs of skis and snowboards that Plant 1 is capable of producing each month. b. Lower equilibrium quantity. More people will die from cancer. Works through central planning by government. This production possibilities curve shows an economy that produces only skis and snowboards. Output began to grow after 1933, but the economy continued to have vast numbers of idle workers, idle factories, and idle farms. Would you be able to consume what you consume now? At point A, Alpine Sports produces 350 pairs of skis per month and no snowboards. 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. The bowed-out shape of the production possibilities curve results from allocating resources based on comparative advantage. The increase in resources devoted to security meant fewer other goods and services could be produced. a. Which of the following is At the same time, more and more wheat is lost. Production and employment fell. The steeper the curve, the greater the opportunity cost of an additional snowboard. By 1933, more than 25% of the nations workers had lost their jobs. If it chooses to produce at point A, for example, it can produce FA units of food and CA units of clothing. d. A shift in the function. B. It suggests that to obtain efficiency in production, factors of production should be allocated on the basis of comparative advantage. Points outside the production possibilities curve represent combinations of products that are: If you have $10,000 to start a lawn-cutting business, the interest rate is 4 percent, your cost of equipment is $3,000, and the earnings you sacrifice from working at another job are $32,000, your yearly cost of doing business would be: An unemployed individual decided to spend the day fishing. b. This straight frontier line indicates a constant opportunity cost. Clearly not. a. a. When economists talk about "optimal outcomes" in the marketplace, they mean that: The answer is Yes, and the key lies in comparative advantage. Plant 3 would be the last plant converted to ski production. 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. d. Decrease and quantity to increase. When an economy is operating on its production possibilities curve, we say that it is engaging in efficient production. To directly answer your question about there being a greater opportunity cost of producing basketballs at (6,6) as opposed to production at (3, 7.5), you are correct. This phenomenon is illustrated graphically with a bow-shaped curve. The economy's capital stock declines The law of supply implies that: An increase in the demand for airline tickets. Producing more snowboards requires shifting resources out of ski production and thus producing fewer skis. Production of basketballs is only possible by producing less of spinners . To provide students with online questions following each video, register your class through the Econ Lowdown Teacher Portal. Consumers increase demand. Which one will it choose to shift? a. Suppose further that all three plants are devoted exclusively to ski production; the firm operates at A. The level of inflation in the economy. a. The market mechanism: The law of increasing opportunity cost helps managers assess the trade-off of a decision to move resources away from one area of production to another. One, of course, was increased defense spending. Change in x coordinates between two points divided by the change in their y coordinates. c. Increase and quantity to increase. Getting the most goods and services from the available resources, Which of the following will cause the production possibilities curve to shift inward? The opportunity cost of moving from . Suppose the firm decides to produce 100 radios. Higher opportunity costs induce higher output per unit of input. Plant R has a comparative advantage in producing calculators. d. Lack of money. Ceteris paribus, if the price of steel rises, then: Product market. d. The public's welfare. c. Experiencing decreasing opportunity costs. The more one is willing to pay for resources, the smaller will be the possible level of production. In the transition to widget production, workers would likely need training and time to develop the skills required to be as productive at making widgets as making gadgets. d. From 2007 to 2008 the demand curve for MP3 players was upward sloping because of improved technology. In this example, production moves to point B, where the economy produces less food (FB) and less clothing (CB) than at point A. b. d. Why she likes candy bars. a. Production had plummeted by almost 30%. Explain the difficulty in managing working capital. For example, many Econ Isle workers are likely very productive gadget makers. d. The supply of cancer-treating curves will increase. a. To construct a production possibilities curve, we will begin with the case of a hypothetical firm, Alpine Sports, Inc., a specialized sports equipment manufacturer. We have already seen that an additional snowboard requires giving up two pairs of skis in Plant 1. Greed. Supply curves are flat. Increasing the availability of these goods would improve the standard of living. b. b. The economy had moved well within its production possibilities curve. B. d. All of the above. If the price of pencils rises, then we will see: b. Chapter 1: Economics: The Study of Choice, Chapter 2: Confronting Scarcity: Choices in Production, Chapter 4: Applications of Demand and Supply, Chapter 5: Elasticity: A Measure of Response, Chapter 6: Markets, Maximizers, and Efficiency, Chapter 7: The Analysis of Consumer Choice, Chapter 9: Competitive Markets for Goods and Services, Chapter 11: The World of Imperfect Competition, Chapter 12: Wages and Employment in Perfect Competition, Chapter 13: Interest Rates and the Markets for Capital and Natural Resources, Chapter 14: Imperfectly Competitive Markets for Factors of Production, Chapter 15: Public Finance and Public Choice, Chapter 16: Antitrust Policy and Business Regulation, Chapter 18: The Economics of the Environment, Chapter 19: Inequality, Poverty, and Discrimination, Chapter 20: Macroeconomics: The Big Picture, Chapter 21: Measuring Total Output and Income, Chapter 22: Aggregate Demand and Aggregate Supply, Chapter 24: The Nature and Creation of Money, Chapter 25: Financial Markets and the Economy, Chapter 28: Consumption and the Aggregate Expenditures Model, Chapter 29: Investment and Economic Activity, Chapter 30: Net Exports and International Finance, Chapter 32: A Brief History of Macroeconomic Thought and Policy, Chapter 34: Socialist Economies in Transition, Figure 2.2 A Production Possibilities Curve, Figure 2.3 The Slope of a Production Possibilities Curve, Figure 2.4 Production Possibilities at Three Plants, Figure 2.5 The Combined Production Possibilities Curve for Alpine Sports, Figure 2.6 Production Possibilities for the Economy, Figure 2.9 Efficient Versus Inefficient Production, Next: 2.3 Applications of the Production Possibilities Model, Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License. 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