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). b. Panel (a) of Figure 2.6 Production Possibilities for the Economy shows the combined curve for the expanded firm, constructed as we did in Figure 2.5 The Combined Production Possibilities Curve for Alpine Sports. Alpine Sports can thus produce 350 pairs of skis per month if it devotes its resources exclusively to ski production. This phenomenon is illustrated graphically with a bow-shaped curve. The PPF captures the concepts of scarcity, choice, and tradeoffs. The opportunity cost of the first 200 pairs of skis is just 100 snowboards at Plant 1, a movement from point D to point C, or 0.5 snowboards per pair of skis. First, remember that opportunity cost is the value of the next-best alternative when a decision is made; it's what is given up. At this point, Econ Isle can produce 12 units of gadgets and 0 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. Where will it produce them? Put calculators on the vertical axis and radios on the horizontal axis. Explain the difficulty in managing working capital. The law also applies as the firm shifts from snowboards to skis. Where will it produce the calculators? The demand curve will shift to the right This is a result of transferring resources from the production of one good to another according to comparative advantage. 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. Capital, as economists use the term, refers to: The role of the entrepreneur in an economy is to: The opportunity cost of studying for an economics test is: A production-possibilities curve indicates the: A point on a nation's production-possibilities curve represents: According to the law of increasing opportunity costs: If the United States decides 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: d. Why she likes candy bars. The continuous change in its slope. Bureaucratic delays In this example, production moves to point B, where the economy produces less food (FB) and less clothing (CB) than at point A. This spending took a variety of forms. 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 Answer: The statement is: True. Plants 2 and 3, if devoted exclusively to ski production, can produce 100 and 50 pairs of skis per month, respectively. a. 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. Producing 1 additional snowboard at point B requires giving up 2 pairs of skis. d. Jenny's wage rate rose and, in response, she decided to work more hours. d. For whom the output is produced and the mix of output to be produced. perfume? Suppose Alpine Sports operates the three plants we examined in Figure 2.4 Production Possibilities at Three Plants. Greater production leads to greater inefficiency. 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. The goal of the consumer in a market economy is to use his/her limited income to buy: She also modified the first plant so that it could produce both snowboards and skis. In other words, the production of wheat is declining by greater and greater amounts: the opportunity cost is increasing. This time, however, imagine that Alpine Sports switches plants from skis to snowboards in numerical order: Plant 1 first, Plant 2 second, and then Plant 3. a. Producing a combination of goods and services beyond the production-possibilities curve. Specialization implies that an economy is producing the goods and services in which it has a comparative advantage. c. The market demand curve intersects the y-axis. The concept of opportunity cost in economics can change depending on the scenario. Lower income. So let's compare straight and curved frontier lines to better understand what is more likely to happen when production changes. d. All of the choices. 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 c. Final goods and services; factors of production If Alpine Sports selects point C in Figure 2.9 Efficient Versus Inefficient Production, for example, it will assign Plant 1 exclusively to ski production and Plants 2 and 3 exclusively to snowboard production. c. Decreasing opportunity costs will occur with greater automobile production. Output began to grow after 1933, but the economy continued to have vast numbers of idle workers, idle factories, and idle farms. That would bring ski production to 300 pairs, at point B. A lower quantity demanded of a good reflects, ceteris paribus: d. The public's welfare. 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 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. To construct a production possibilities curve, we will begin with the case of a hypothetical firm, Alpine Sports, Inc., a specialized sports equipment manufacturer. b. b. b. d. No change in the supply of or demand for airline tickets because the price is not changing right now. The supply of MP3 players increased from 2007 to 2008. Points on the interior of the PPC are inefficient, points on the PPC are efficient, and points beyond the PPC are unattainable. A downward shift of the supply curve. D. Increasing opportunity costs will occur with greater tank production, D. Increasing opportunity costs will occur with greater tank production, When an economy is producing efficiently, it is The increase in spending on security, to SA units of security per period, has an opportunity cost of reduced production of all other goods and services. In an actual economy, with a tremendous number of firms and workers, it is easy to see that the production possibilities curve will be smooth. Notice also that this curve has no numbers. The production possibilities model does not tell us where on the curve a particular economy will operate. a. b. c. Increase and quantity to increase. Increase and quantity to decrease. The mix of output to be produced and the resources to be used in the production process. 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. What b. Laissez faire. Which one will it choose to shift? Sort by: At the same time, more and more wheat is lost. Finally, increasing by another 2, Econ Isle can produce 0 gadgets and 6 widgets. Suppose that, as before, Alpine Sports has been producing only skis. Price. Economic Lowdown Video Series, economic education specialist Scott Wolla explains how the production possibilities frontier (PPF) illustrates some very important economic concepts. Resources are no longer limited. Could it still operate inside its production possibilities curve? 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. Which of the following is a determinant of supply? Here's widget production increased by 2. The slope of Plant 1s production possibilities curve measures the rate at which Alpine Sports must give up ski production to produce additional snowboards. If it chooses to produce at point A, for example, it can produce FA units of food and CA units of clothing. Supply curves are flat. A linear function can be distinguished by: The bowed-out shape of the production possibilities curve illustrates the law of increasing opportunity cost. a. b. As we include more and more production units, the curve will become smoother and smoother. The Latin phrase "ceteris paribus" means: 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. In this episode of the b. A straight line indicating that the law of increasing opportunity costs applies Results from a change in price of other goods. c. The mix of output to be produced, the resources to be used in the production process, and for whom the Greater production of one good requires increasingly larger sacrifices of other goods. The decision to devote more resources to security and less to other goods and services represents the choice we discussed in the chapter introduction. employment was associated primarily with the work of: Segment 3 of The Production Possibilities Frontier uses the production possibilities frontier to demonstrate how, in the real world, opportunity cost increases as production increases. d. National goods and services; factors of production. Now suppose that, to increase snowboard production, it transfers plants in numerical order: Plant 1 first, then Plant 2, and finally Plant 3. The VMWare acquisition broadened EMC's core data storage device business to include software technology enabling multiple operating systems-such as Microsoft's Windows, Linux, and OS X-to simultaneously and independently run on the same Intel-based server or workstation. The slope equals 2 pairs of skis/snowboard (that is, it must give up two pairs of skis to free up the resources necessary to produce one additional snowboard). When the market mechanism is allowed to operate freely, prices will determine: a. c. Percentage change in y coordinates between two points divided by the percentage change in their x coordinates. c. Shortages of building materials and a slower recovery from the storm It has an advantage not because it can produce more snowboards than the other plants (all the plants in this example are capable of producing up to 100 snowboards per month) but because it is the least productive plant for making skis. a. In terms of the production possibilities curve in Figure 2.7 Spending More for Security, the choice to produce more security and less of other goods and services means a movement from A to B. Markets have to have both a demand side and a supply side. But this time we'll consider opportunity cost that varies along the frontier. d. Lack of money. 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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