Explain the concept of the production possibilities curve and understand the implications of its downward slope and bowed-out shape. Notice that this curve is linear. Its land is devoted largely to nonagricultural use. c. Government purchases decrease. b. The negative slope of the production possibilities curve reflects the scarcity of the plants capital and labor. Finished goods are bought and sold. Hence, the law of increasing opportunity cost. It need not imply that a particular plant is especially good at an activity. The economy produces SA units of security and OA units of all other goods and services per period. a. . c. Supply curves are downward-sloping to the right. In other words, the opportunity cost of producing 2 widgets is 2 gadgets. c. Congress increased the minimum wage rate in January. Plant 3 would be the last plant converted to ski production. Specifically, if it raises production of one product, the opportunity cost of making the next unit rises. 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). Thus, the economy chose to increase spending on security in the effort to defeat terrorism. The law of increasing opportunity cost states that whenever the same resource allocation decision is made, the opportunity cost will increase. b. Adam Smith. a. Public-goods market. Up to this point we've graphed the PPF as a straight line. d. From 2007 to 2008 the demand curve for MP3 players was upward sloping because of improved technology. 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. Learn more about the Q&A Resources for Teachers and Students . Thus, the production possibilities curve not only shows what can be produced; it provides insight into how goods and services should be produced. An economys factors of production are scarce; they cannot produce an unlimited quantity of goods and services. It shows that opportunity cost varies along the frontier. In the summer of 1929, however, things started going wrong. Of course, an economy cannot really produce security; it can only attempt to provide it. But this time we'll consider opportunity cost that varies along the frontier. The demand for MP3 players increased from 2007 to 2008. 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. can we conclude about changes in the price and quantity of salsa? Much of the land in the United States has a comparative advantage in agricultural production and is devoted to that activity. c. Through government mandate. 2(163/4)23\frac{2\left(16^{3 / 4}\right)}{2^3} The greater the absolute value of the slope of the production possibilities curve, the greater the opportunity cost will be. When economists talk about "optimal outcomes" in the marketplace, they mean that: Assume milk is used to produce ice cream. b. c. An increase in the demand for corn syrup. What can Americans do to influence the economic goals of the nation? As the law says, as you increase the production of one good, the opportunity cost to produce the additional good increases. the opportunity cost of fishing is: B. a. John Maynard Keynes. The opportunity cost of an additional snowboard at each plant equals the absolute values of these slopes. Ceteris paribus, if buyers expect the price of airline tickets to fall in the future, then right now there should To see this relationship more clearly, examine Figure 2.3 The Slope of a Production Possibilities Curve. a. The gains we achieve through specialization are enormous. In this example, production moves to point B, where the economy produces less food (FB) and less clothing (CB) than at point A. In the section of the curve shown here, the slope can be calculated between points B and B. Transcribed image text: According to the law of increasing additional cost, the opportunity cost of producing O A. corn is likely to increase as society tries to produce more beans. The table shows the combinations of pairs of skis and snowboards that Plant 1 is capable of producing each month. Increases as its price rises, ceteris paribus. Let's increase widget production in increments of 2 again until only widgets and no gadgets are produced. b. b. So along the straight line, each time Econ Isle increases widget production by 2, it loses the opportunity to produce 4 gadgets. Supply curves are upward-sloping to the right. What Is A Simple Definition Of Opportunity Cost? This curve depicts an entire economy that produces only skis and snowboards. 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. 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. Plants 2 and 3, if devoted exclusively to ski production, can produce 100 and 50 pairs of skis per month, respectively. This production possibilities curve includes 10 linear segments and is almost a smooth curve. d. There will be a rightward movement along the initial supply curve for monkey wrenches. d. Supply because of a change in a non-price determinant. d. All of the choices. For this scenario to take the factors of production -land, labor, and capital- must be at their maximum efficiency. a. d. Every market transaction involves an exchange of dollars for goods or resources. Explain the difficulty in managing working capital. Receive updates in your inbox as soon as new content is published on our website, Resources For Teachers & Students in Economics and Personal Finance, The Production Possibilities Frontier - The Economic Lowdown Video Series, Learn more about the Q&A Resources for Teachers and Students , Segment 1: The PPF Illustrates Scarcity and Opportunity Cost, Segment 2: The PPF Illustrates Underemployment, Economic Expansion, and Economic Growth, Factors of Production/Productive Resources. Plant S has a comparative advantage in producing radios, so, if the firm goes from producing 150 calculators and no radios to producing 100 radios, it will produce them at Plant S. In the production possibilities curve for both plants, the firm would be at M, producing 100 calculators at Plant R. Principles of Economics by University of Minnesota is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted. Through detailed databases. People work and use the income they earn to buyperhaps importgoods and services from people who have a comparative advantage in doing other things. be: The demand curve will shift to the left The downward slope of the production possibilities curve is an implication of scarcity. Is not a very efficient means of communicating consumer demand to the producers of goods and services. This spending took a variety of forms. Plant 3 would be the last plant converted to ski production. b. Law of Increasing Costs Which of the following people is an entrepreneur? Specialization means that an economy is producing the goods and services in which it has a comparative advantage. Instead, it lays out the possibilities facing the economy. 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. Airports around the world hired additional agents to inspect luggage and passengers. Once again, this is made possible because of trade-offs. Land, labor, or capital is bought and sold. Producers increase supply. 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. The production of both goods rises. 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. Producing more skis requires shifting resources out of snowboard production and thus producing fewer snowboards. If it fails to do that, it will operate inside the curve. The points on a production-possibilities curve show: The steeper the curve, the greater the opportunity cost of an additional snowboard. b. When a surplus exists for a product: In a market economy, which of the following is an incentive for producers to produce efficiently? Supply curves are flat. 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 Plant 3s comparative advantage in snowboard production makes a crucial point about the nature of comparative advantage. B. We would say that Plant 1 has a comparative advantage in ski production. To shift from B to B, Alpine Sports must give up two more pairs of skis per snowboard. Clearly not. Approximately three-fourths of the 78 first-quarter deals occurred between information technology (IT) companies. D. producing equal amounts of all goods, B. b. In either case, production within the production possibilities curve implies the economy could improve its performance. a. b. d. Find the difference between the quantity demanded and the quantity supplied at each price. d. Ronald Reagan. Inefficient production implies that the economy could be producing more goods without using any additional labor, capital, or natural resources. When an economy is operating on its production possibilities curve, we say that it is engaging in efficient production. b. Greater production of one good requires increasingly larger sacrifices of other goods. c. A higher price of the good. 20 hours/2 gallons is 10 gallons of wine per day. c. Also means demand has shifted. D. Only those resources that are privately owned are counted as factors of production, Which of the following correctly characterizes the shape of a constant opportunity cost production possibilities curve? Expanding snowboard production to 51 snowboards per month from 50 snowboards per month requires a reduction in ski production to 98 pairs of skis per month from 100 pairs. The law of increasing opportunity cost states that when firms decide to make additional units of a certain product by reallocating resources, they do that at a higher opportunity cost than the previous production. First, let's figure out the total number of each you can produce. c. There will be a movement to the right along the initial demand curve Suppose it begins at point D, producing 300 snowboards per month and no skis. Such specialization is typical in an economic system. Sort by: c. The quantity increases but the change in the price cannot be determined c. How many candy bars she will actually buy. First, remember that opportunity cost is the value of the next-best alternative when a decision is made; it's what is given up. Local and state governments also increased spending in an effort to prevent terrorist attacks. 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. An economy that fails to make full and efficient use of its factors of production will operate inside its production possibilities curve. Figure 2.8 Idle Factors and Production shows an economy that can produce food and clothing. 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. c. The production-possibilities curve The market supply curve intersects the y-axis. If the quantity demanded of a good is greater than the quantity supplied of the good at the current price, View the full answer. Greater production means factor prices rise. These intercepts tell us the maximum number of pairs of skis each plant can produce. Increasing opportunity cost is important in business and economics because it describes the danger of a complete shift into non-production. \textbf{Right-hand endpoints}: S_R=\frac{14 n^2+18 n+4}{3 n^2} 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. Between points A and B, for example, the slope equals 2 pairs of skis/snowboard (equals 100 pairs of skis/50 snowboards). The table in Figure 2.2 A Production Possibilities Curve gives three combinations of skis and snowboards that Plant 1 can produce each month. Now draw the combined curves for the two plants. a. A straight line when there is constant opportunity costs o Higher opportunity costs induce higher output per unit of This problem has been solved! 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. The slope of the linear production possibilities curve in Figure 2.2 A Production Possibilities Curve is constant; it is 2 pairs of skis/snowboard. d. An increase in the price of electricity. Expert Answer. 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. d. The supply of building materials to Florida will increase. The production possibilities curves for the two plants are shown, along with the combined curve for both plants. A. bureaucratic delays Microeconomics is concerned with issues such as: People benefit by participating in the market because: Assume that steel is used to produce monkey wrenches. B. a. If an economy is producing inside the production-possibilities curve, then: b. A downward shift of the supply curve. I hope you have enjoyed your journey to the frontier and learned some valuable lessons about economics along the way. C. factors of production include land, labor, capital, and entrepreneurship We shall examine the significance of the bowed-out shape of the curve in the next section. A decrease in the supply of airline tickets. Producing more snowboards requires shifting resources out of ski production and thus producing fewer skis. That will require shifting one of its plants out of ski production. 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