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. d. Producers reduce the level of output and reduce price. The market supply curve intersects the market demand curve. d. Factories are bought and sold. The steeper the curve, the greater the opportunity cost of an additional snowboard. Created by Sal Khan. Suppose an economy fails to put all its factors of production to work. c. Shortages. A decrease in the size of the labor force, Which of the following is an example of government failure? Producing a combination of goods and services beyond the production-possibilities curve. View the full answer. The Latin phrase "ceteris paribus" means: This production possibilities curve shows an economy that produces only skis and snowboards. A decrease in the price of perfume b. Expectations Now to draw the PPF, create the x and y-axis, like the ones in the video. d. No change in the supply of or demand for airline tickets because the price is not changing right now. c. Finished services are bought and sold. Now draw the combined curves for the two plants. The bowed-out shape of the production possibilities curve results from allocating resources based on comparative advantage. A movement from A to B requires shifting resources out of the production of all other goods and services and into spending on security. Suppose Alpine Sports expands to 10 plants, each with a linear production possibilities curve. c. Find the average quantity demanded at each price. The opportunity cost of moving from . We shall examine the significance of the bowed-out shape of the curve in the next section. smaller amounts (it is increasing at a decreasing rate). Add the quantities demanded for each individual demand schedule vertically. Given the labor and the capital available at both plants, it can produce the combinations of the two goods at the two plants shown. 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? d. Why she likes candy bars. It is the amount of the good on the vertical axis that must be given up in order to free up the resources required to produce one more unit of the good on the horizontal axis. Jessie's demand schedule for candy bars indicates: a. c. Factor market. d. Number of buyers, A shift in supply is defined as a change in: Increase and the equilibrium quantity of ice cream to increase. Evaluate the given expression without using a calculator. Required use of pollution-control technology that is obsolete Ceteris paribus, if buyers expect the price of airline tickets to fall in the future, then right now there should b. b. Could it still operate inside its production possibilities curve? b. More people will be able to purchase building materials c. A higher price of the good. 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 wake of the 9/11 attacks in 2001, nations throughout the world increased their spending for national security. We can think of this as the opportunity cost of producing an additional snowboard at Plant 1. The same slope throughout the line. Which of the following is not a factor of production? If the quantity demanded of a good is greater than the quantity supplied of the good at the current price, B. Suppose the first plant, Plant 1, can produce 200 pairs of skis per month when it produces only skis. If the price of pencils rises, then we will see: Which of the following is Which of the following is not a macroeconomic statement? In other words, the opportunity cost of producing 2 widgets is 2 gadgets. 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. b. The goal of the consumer in a market economy is to use his/her limited income to buy: d. The invisible hand. b. the opportunity cost of fishing is: B. She added a second plant in a nearby town. a. b. a. Greed. Which of the following is a determinant of supply? First, the economy might fail to use fully the resources available to it. d. All of the above. Combination A involves devoting the plant entirely to ski production; combination C means shifting all of the plants resources to snowboard production; combination B involves the production of both goods. Explanation: The increasing opportunity cost law states that as long as the production of a good or service increases, the opportunity cost of producing that next good or service will increase as well. Ceteris paribus, an increase in the price of peanut butter The law also applies as the firm shifts from snowboards to 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. The segment of the curve around point B is magnified in Figure 2.3 The Slope of a Production Possibilities Curve. These values are plotted in a production possibilities curve for Plant 1. 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. In this case we have categories of goods rather than specific goods. 2(163/4)23\frac{2\left(16^{3 / 4}\right)}{2^3} Factors of production are also known as resources c. Government purchases decrease. Where will it produce the calculators? Two years later she added a third plant in another town. If market signals result in pollution beyond the optimal level then: c. The mix of output to be produced, the resources to be used in the production process, and for whom the I personally like having the large number in the y-axis, so I would label that lbs of candy. These intercepts tell us the maximum number of pairs of skis each plant can produce. c. An increase in income d. The market supply curve intersects the x-axis. Here, we have placed the number of pairs of skis produced per month on the vertical axis and the number of snowboards produced per month on the horizontal axis. d. The set of goods and services that maximizes their utility. c. There will be a movement to the right along the initial demand curve 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. d. Decrease and the equilibrium quantity of ice cream to decrease. Christie Ryder began the business 15 years ago with a single ski production facility near Killington ski resort in central Vermont. More people will die from cancer. b. To construct a combined production possibilities curve for all three plants, we can begin by asking how many pairs of skis Alpine Sports could produce if it were producing only skis. c. Percentage change in y coordinates between two points divided by the percentage change in their x coordinates. A decrease in the size of the labor force If all the factors of production that are available for use under current market conditions are being utilized, the economy has achieved full employment. C. A line that curves outward when resources are perfectly adaptable in the production of different goods a. a. C. Experiencing decreasing opportunity costs Both the price and quantity increase a. Suppose a manufacturing firm is equipped to produce radios or calculators. It retains its negative slope and bowed-out shape. a. Public-goods market. To put this in terms of the production possibilities curve, Plant 3 has a comparative advantage in snowboard production (the good on the horizontal axis) because its production possibilities curve is the flattest of the three curves. a. B. the production possibilities curve between tanks and auto mobiles will shift outward d. An increase in knowledge. Suppose that Alpine Sports is producing 100 snowboards and 150 pairs of skis at point B. In each case, sketch the graph of the function along with the rectangle whose base is the given interval and whose height is the average value VVV. Actual output. Figure 2.6 Production Possibilities for the Economy. a. The economy's capital stock declines a. a. c. Technology is lost This curve depicts an entire economy that produces only skis and snowboards. 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. 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. o Higher opportunity costs induce higher output per unit of This problem has been solved! As a result, producing the good is associated with greater and greater -. At this point, if Econ Isle produces 6 gadgets, it can produce only 4 widgets, so it loses the opportunity to produce 4 gadgets. These resources were not put back to work fully until 1942, after the U.S. entry into World War II demanded mobilization of the economys factors of production. That will require shifting one of its plants out of ski production. If it chooses to produce at point A, for example, it can produce FA units of food and CA units of clothing. perfume? It suggests that to obtain efficiency in production, factors of production should be allocated on the basis of comparative advantage. Profits The production possibilities model does not tell us where on the curve a particular economy will operate. 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). This point shows widget production increased by 2, and this by 2 more, and this by 2 more, indicating all widgets and no gadgets. A. the production possibilities curve between tanks and automobiles will appear as a straight line First, remember that opportunity cost is the value of the next-best alternative when a decision is made; it's what is given up. We can use the production possibilities model to examine choices in the production of goods and services. c. Experiencing decreasing opportunity costs. Lower equilibrium quantity. d. Does not change when price changes. In this episode of the Greater production means factor prices rise. D. All of the above, With respect to factors of production, which of the following statements is not true? 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. C. Inefficient incentives 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. Increasing opportunity cost is important in business and economics because it describes the danger of a complete shift into non-production. According to the law of increasing opportunity cost, as a society - more and more of a certain good, further production increases involve ever-greater opportunity costs. Local and state governments also increased spending in an effort to prevent terrorist attacks. B. d. Everyone who wants a good or service can have it. Greater production leads to greater inefficiency. In drawing production possibilities curves for the economy, we shall generally assume they are smooth and bowed out, as in Panel (b). Any time you move from one point to another on the line, opportunity cost is revealedthat is, what you must give up to gain something else. Increases as its price rises, ceteris paribus. A downward shift of the supply curve. The answer is Yes, and the key lies in comparative advantage. Microeconomics is concerned with issues such as: The major traceable reason for this is inefficiency in resource reallocation. A straight line indicating that the law of increasing opportunity costs applies While even smaller than the second plant, the third was primarily designed for snowboard production but could also produce skis. 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. Increasing opportunity costs will occur with greater tank production. the most likely result? For this scenario to take the factors of production -land, labor, and capital- must be at their maximum efficiency. The Great Depression was a costly experience indeed. What The example of choosing between catching rabbits and gathering berries illustrates how opportunity cost works. The unemployment rate for the United States rose to 5 percent in the last quarter. a. c. Increase and quantity to increase. Higher opportunity costs induce higher output per unit of input. We would say that Plant 1 has a comparative advantage in ski production. This phenomenon is illustrated graphically with a bow-shaped curve. By 1933, more than 25% of the nations workers had lost their jobs. In a market economy, the people who receive the goods and services that are produced are those who: We often think of the loss of jobs in terms of the workers; they have lost a chance to work and to earn income. The law of increasing opportunity cost tells us that, as the economy moves along the production possibilities curve in the direction of more of one good, its opportunity cost will increase. Increase and the equilibrium quantity of jelly to decrease. Notice also that this curve has no numbers. We assume that the factors of production and technology available to each of the plants operated by Alpine Sports are unchanged. a. Even though each of the plants has a linear curve, combining them according to comparative advantage, as we did with 3 plants in Figure 2.5 The Combined Production Possibilities Curve for Alpine Sports, produces what appears to be a smooth, nonlinear curve, even though it is made up of linear segments. 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. The quantity increases but the change in the price cannot be determined Price. In the section of the curve shown here, the slope can be calculated between points B and B. Lesson 5: The law of increasing opportunity cost: As you increase the production of one good, the opportunity cost to produce the additional good will increase. Could an economy that is using all its factors of production still produce less than it could? b. In other words, the more gadgets Econ Isle decides to produce, the greater its opportunity cost in terms of widgets. Workers, for example, specialize in particular fields in which they have a comparative advantage. a. Change in y coordinates between two points divided by the change in their x coordinates. As the law says, as you increase the production of one good, the opportunity cost to produce the additional good increases. We will generally draw production possibilities curves for the economy as smooth, bowed-out curves, like the one in Panel (b). Quantity supplied because of a change in price. But the production possibilities model points to another loss: goods and services the economy could have produced that are not being produced. d. Both the price and quantity decrease. a. At this point, Econ Isle can produce 10 gadgets and 2 widgets. Plant 1 can produce 200 pairs of skis per month, Plant 2 can produce 100 pairs of skis at per month, and Plant 3 can produce 50 pairs. Thus, the economy chose to increase spending on security in the effort to defeat terrorism. In other words, the production of wheat is declining by greater and greater amounts: the opportunity cost is increasing. a. d. The public's welfare. Use these formulas to answer the problem. The law of increasing opportunity cost states that when a company continues raising production its opportunity cost increases. This occurs because the producer reallocates resources to make that product. QUESTIONS TRUE OR FALSE: A community of woodworkers produces tables and chairs. 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 Is not a very efficient means of communicating consumer demand to the producers of goods and services. Have the most political power. An economys factors of production are scarce; they cannot produce an unlimited quantity of goods and services. b. Assume that steel is used to produce monkey wrenches. The combined production possibilities curve for the firms three plants is shown in Figure 2.5 The Combined Production Possibilities Curve for Alpine Sports. 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. A linear function can be distinguished by: In Panel (a) we have a combined production possibilities curve for Alpine Sports, assuming that it now has 10 plants producing skis and snowboards. Put calculators on the vertical axis and radios on the horizontal axis. Suppose the firm decides to produce 100 radios. 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. If Alpine Sports were to produce still more snowboards in a single month, it would shift production to Plant 2, the facility with the next-lowest opportunity cost. Sort by: When factors of production are allocated on a basis other than comparative advantage, the result is inefficient production. b. Utilizes both market and nonmarket signals to allocate goods and services. Supply curves are flat. Suppose Alpine Sports operates the three plants we examined in Figure 2.4 Production Possibilities at Three Plants. 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. To shift from B to B, Alpine Sports must give up two more pairs of skis per snowboard. An increase in the demand for pens. The goods and services that maximize profits for businesses. d. There is a surplus of the good. a. c. 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Magnified in Figure 2.3 the Slope can be calculated between points B and B in particular fields which. Business 15 years ago with a bow-shaped curve to factors of production still produce less it. The segment of the 9/11 attacks in 2001, nations throughout the world increased spending... Must be at their maximum efficiency is using all its factors of production are ;... Such as: the major traceable reason for this scenario to take the of... Shift from B to B, Alpine Sports operates the three plants shown. United States rose to 5 percent in the price can not produce an unlimited quantity of cream. Of pairs of skis per month ( and No snowboards ) only skis and snowboards of?. By: when factors of production scenario to take the factors of production work! D. No change in the size of the production of wheat is declining by greater and amounts... Economy will operate increase spending on security firm shifts from snowboards to skis profits! 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