These are also illustrated with a production possibilities curve. The Federal Reserve lowered interest rates at their last meeting. Suppose Alpine Sports operates the three plants we examined in Figure 2.4 Production Possibilities at Three Plants. be: a. It suggests that to obtain efficiency in production, factors of production should be allocated on the basis of comparative advantage. The supply curve for monkey wrenches will shift to the left. c. Decreasing opportunity costs will occur with greater automobile production. That will require shifting one of its plants out of ski production. b. At this point, Econ Isle can produce 12 units of gadgets and 0 widgets. The answer is Yes, and the key lies in comparative advantage. An economy achieves a point on its production possibilities curve only if it allocates its factors of production on the basis of comparative advantage. As a result, producing the good is associated with greater and greater -. Sort by: b. A production possibilities curve is a graphical representation of the alternative combinations of goods and services an economy can produce. The demand curve will shift to the left Plant 3s comparative advantage in snowboard production makes a crucial point about the nature of comparative advantage. Answer: The statement is: True. b. B. Producing more snowboards requires shifting resources out of ski production and thus producing fewer skis. Suppose Alpine Sports expands to 10 plants, each with a linear production possibilities curve. 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. This phenomenon is illustrated graphically with a bow-shaped curve. In Panel (a) we have a combined production possibilities curve for Alpine Sports, assuming that it now has 10 plants producing skis and snowboards. Plant 3 would be the last plant converted to ski production. a. d. An increase in knowledge. I personally like having the large number in the y-axis, so I would label that lbs of candy. Production of basketballs is only possible by producing less of spinners . constraints. a. Clearly not. d. Participants in the market do not have to make choices. c. Experiencing decreasing opportunity costs. Suppose a hurricane hits Florida causing widespread damage to houses and businesses. a. The Great Depression was a costly experience indeed. Figure 2.4 Production Possibilities at Three Plants shows production possibilities curves for each of the firms three plants. a. We assume that the factors of production and technology available to each of the plants operated by Alpine Sports are unchanged. a. . 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). It need not imply that a particular plant is especially good at an activity. The prices of the factors of production 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. d. Means that price has changed and there is movement along the demand curve. An increase in the demand for pens. Ceteris paribus, if the subsidies given to corn syrup producer decrease, then we can expect: b. the opportunity cost of fishing is: B. In other words, the production of wheat is declining by greater and greater amounts: the opportunity cost is increasing. d. Through trial and error. c. There will be no change in the number of people who die from cancer. Producing more skis requires shifting resources out of snowboard production and thus producing fewer snowboards. Florida places a price ceiling on all building materials to keep the prices reasonable. In other words, the opportunity cost of producing 2 widgets is now 6 gadgets. According to the law of increasing opportunity costs, A. the more one is willing to pay for resources, the smaller will be the possible level of production B. increasing the production of a particular good will cause the price of the good to remain constant C. a. d. There is a surplus of the good. 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. a. Well, some resources are better suited for some tasks than others. c. The production-possibilities curve QUESTIONS TRUE OR FALSE: A community of woodworkers produces tables and chairs. As the law says, as you increase the production of one good, the opportunity cost to produce the additional good increases. b. A straight line when there is constant opportunity costs, Chapter 1 PPF (Production Possibility Frontie, ANSC 201 Chip. It has not been edited for readability, and there may be slight differences between the text and the video. The slope between points B and B is 2 pairs of skis/snowboard. Supply curves are upward-sloping to the right. d. For whom the output is produced and the mix of output to be produced. d. Are willing to pay the highest price. a. Desired output. Plant 3, though, is the least efficient of the three in ski production. 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. Ski sales grew, and she also saw demand for snowboards risingparticularly after snowboard competition events were included in the 2002 Winter Olympics in Salt Lake City. b. C. 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. Also, I guess that the law of increasing opportunity cost is the opposite of economies of scale. Lower equilibrium price. c. Government purchases decrease. The table in Figure 2.2 A Production Possibilities Curve gives three combinations of skis and snowboards that Plant 1 can produce each month. 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. 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. Plant 3 has a comparative advantage in snowboard production because it is the plant for which the opportunity cost of additional snowboards is lowest. C d. Higher opportunity costs induce higher output per unit of input. Ceteris paribus, if the price of steel rises, then: Figure 2.5 The Combined Production Possibilities Curve for Alpine Sports. The market supply curve intersects the market demand curve. There are always participants in the market that are more efficient than you are in production. A market in which final goods and services are exchanged is a: d. The market supply curve intersects the x-axis. Statistical Techniques in Business and Economics, Douglas A. Lind, Samuel A. Wathen, William G. Marchal, Alexander Holmes, Barbara Illowsky, Susan Dean, Claudia Bienias Gilbertson, Debra Gentene, Mark W Lehman, Fundamentals of Engineering Economic Analysis, David Besanko, Mark Shanley, Scott Schaefer. This opportunity cost equals the absolute value of the slope of the production possibilities curve. Now suppose Alpine Sports is fully employing its factors of production. Is justified by the superiority of laissez faire over government intervention. The greater the absolute value of the slope of the production possibilities curve, the greater the opportunity cost will be. Suppose an economy fails to put all its factors of production to work. 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. a. It can shift to ski production at a relatively low cost at first. b. Think about what life would be like without specialization. c. Supply curves are downward-sloping to the right. Consumer tastes or preferences c. There will be a leftward movement along the initial supply curve for monkey wrenches. can we conclude about changes in the price and quantity of salsa? Let's increase widget production in increments of 2 again until only widgets and no gadgets are produced. 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 Thus, the economy chose to increase spending on security in the effort to defeat terrorism. d. Income. 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 linear function can be distinguished by: A decrease in the supply of airline tickets. d. Both the price and quantity decrease. B. A rightward shift in a demand curve and a rightward shift in a supply curve both result in a: c. The price of the good itself The combined production possibilities curve for the firms three plants is shown in Figure 2.5 The Combined Production Possibilities Curve for Alpine Sports. c. An increase in income In drawing production possibilities curves for the economy, we shall generally assume they are smooth and bowed out, as in Panel (b). However, a straight line doesn't best reflect how the real economy uses resources to produce goods. The more one is willing to pay for resources, the smaller will be the possible level of production. Instead, it lays out the possibilities facing the economy. a. Public-goods market. The production-possibilities curve between tanks and automobiles will shift outward. The law also applies as the firm shifts from snowboards to skis. b. Output began to grow after 1933, but the economy continued to have vast numbers of idle workers, idle factories, and idle farms. 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, so that producing the good is associated with greater and greater trade-offs. c. Other things remain equal. c. Increase and quantity to increase. The more one is willing to pay for resources, the smaller will be the possible level of production. c. Decrease and the equilibrium quantity of ice cream to increase. 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. c. Karl Marx. Required use of pollution control technology that is obsolete First, let's figure out the total number of each you can produce. Here's widget production increased by 2. 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. 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. Plant 3 would be the last plant converted to ski production. Find the average value VVV of the given function over the specified interval. The supply curve for monkey wrenches will shift to the right. 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. The level of inflation in the economy. In other words, the opportunity cost of producing 2 widgets is now 4 gadgets. The fact that there are too few resources to satisfy all our wants is attributed to: If the firm wishes to increase snowboard production, it will first use Plant 3, which has a comparative advantage in snowboards. This straight frontier line indicates a constant opportunity cost. If it fails to do that, it will operate inside the curve. The goal of the consumer in a market economy is to use his/her limited income to 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. Now draw the combined curves for the two plants. b. The supply of MP3 players increased from 2007 to 2008. The production of both goods rises. The absolute value of the slope of a production possibilities curve measures the opportunity cost of an additional unit of the good on the horizontal axis measured in terms of the quantity of the good on the vertical axis that must be forgone. Instead of the bowed-out production possibilities curve ABCD, we get a bowed-in curve, ABCD. It can produce skis and snowboards simultaneously as well. Such an allocation implies that the law of increasing opportunity cost will hold. Explain the concept of the production possibilities curve and understand the implications of its downward slope and bowed-out shape. If Econ Isle transitions from widget production to gadget production, it must give up an increasing number of widgets to produce the same number of gadgets. Which of the following is C. Experiencing decreasing opportunity costs a. Ceteris paribus, if buyers expect the price of airline tickets to fall in the future, then right now there should Specialization means that an economy is producing the goods and services in which it has a comparative advantage. b. 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. Its resources were fully employed; it was operating quite close to its production possibilities curve. According to the law of increasing opportunity costs: a. Created by Sal Khan. Increase and the equilibrium quantity of jelly to decrease. b. Consumers increase demand. Which of the following is not a factor of production? The reason for the law of increasing opportunity cost is due to the fact that some resources are not well suited for What can Americans do to influence the economic goals of the nation? D. a line that curves inward when resources are perfectly adaptable in the production of different goods, 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. In radios? Question: According to the law of increasing opportunity costs: A. Ceteris paribus, an increase in the price of peanut butter These values are plotted in a production possibilities curve for Plant 1. To see this relationship more clearly, examine Figure 2.3 The Slope of a Production Possibilities Curve. c. The two types of markets include the factor and product markets. C. A line that curves outward when resources are perfectly adaptable in the production of different goods Hence, the law of increasing opportunity cost. Some workers are without jobs, some buildings are without occupants, some fields are without crops. The decision to devote more resources to security and less to other goods and services represents the choice we discussed in the chapter introduction. Suppose it begins at point D, producing 300 snowboards per month and no skis. We would say that Plant 1 has a comparative advantage in ski production. d. Is one that allows trade with other countries. Jessie's demand schedule for candy bars indicates: d. There are not enough resources available to produce more output. a. b. 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. If it chooses to produce at point A, for example, it can produce FA units of food and CA units of clothing. 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. d. Factories are bought and sold. Figure 2.3 The Slope of a Production Possibilities Curve. The production possibilities model suggests that specialization will occur. C. Inefficient incentives The continuous change in its slope. This curved line illustrates our fifth and final lesson. The resources to be used in the production process and for whom the output is produced. In this section, we shall assume that the economy operates on its production possibilities curve so that an increase in the production of one good in the model implies a reduction in the production of the other. Suppose that, as before, Alpine Sports has been producing only skis. a. b. Adam Smith. As we include more and more production units, the curve will become smoother and smoother. 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