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. For example, there might be a trade-off between hunting for rabbits or gathering berries. A movement from A to B requires shifting resources out of the production of all other goods and services and into spending on security. These are also illustrated with a production possibilities curve. c. Shortages. 100% (6 ratings) The correct option is C- cost of producing corn is likely to in . b. Opportunity cost is the trade-off that one makes when deciding between two options. A consequence of the economic problem of scarcity is that: With respect to factors of production, which of the following statements is not true? However, a straight line doesn't best reflect how the real economy uses resources to produce goods. Put calculators on the vertical axis and radios on the horizontal axis. As a result, producing the good is associated with greater and greater -. be: What can Americans do to influence the economic goals of the nation? Actual output. We will generally draw production possibilities curves for the economy as smooth, bowed-out curves, like the one in Panel (b). How is a nation different than a state or country? This curved line illustrates our fifth and final lesson. If the government places a binding price ceiling on cancer-treating drugs, then: The curve is a downward-sloping straight line, indicating that there is a linear, negative relationship between the production of the two goods. B. 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. a. 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. Second, it might not allocate resources on the basis of comparative advantage. a. John Maynard Keynes. Whether you realize it or not, the economy has a frontierit has an outer limit of economic production. Up to this point we've graphed the PPF as a straight line. The steeper the curve, the greater the opportunity cost of an additional snowboard. a. 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 2008 the same company sold 40,000 MP3 c. A technological advance d. Participants in the market do not have to make choices. b. The economy's capital stock declines Clearly, the transfer of resources to the effort to enhance national security reduces the quantity of other goods and services that can be produced. Greater production of one good requires increasingly larger sacrifices of other goods. d. People begin to retire at earlier ages, Which of the following will cause the production-possibilities curve to shift inward? b. 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 It need not imply that a particular plant is especially good at an activity. d. The government is allocating resources inefficiently. Ceteris paribus, if the price of steel rises, then: Ceteris paribus, which of the following is most likely to shift both the demand and the supply curve? 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. Specialization means that an economy is producing the goods and services in which it has a comparative advantage. c. Karl Marx. A. According to the law of increasing opportunity costs, Multiple Choice Greater production leads to greater inefficiency. A lower quantity demanded of a good reflects, ceteris paribus: Increasing opportunity cost is important in business and economics because it describes the danger of a complete shift into non-production. Increase and quantity to decrease. a. a. b. Would you be able to consume what you consume now? Of course, an economy cannot really produce security; it can only attempt to provide it. A downward shift of the supply curve. Microeconomics is concerned with issues such as: 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 attempt to provide it requires resources; it is in that sense that we shall speak of the economy as producing security. The opportunity cost of an additional snowboard at each plant equals the absolute values of these slopes. In turn, movement from a point of underemployment toward the frontier indicates economic expansion. Explain the concept of the production possibilities curve and understand the implications of its downward slope and bowed-out shape. c. Income d. Labor market. 1. Instead, it lays out the possibilities facing the economy. 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. The increase in resources devoted to security meant fewer other goods and services could be produced. Resources are no longer limited. A decrease in the size of the labor force, Which of the following is an example of government failure? Plant 3 would be the last plant converted to ski production. This production possibilities curve includes 10 linear segments and is almost a smooth curve. a. Desired output. 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. A decrease in the demand for airline tickets. A. the production possibilities curve between tanks and automobiles will appear as a straight line The production possibilities model suggests that specialization will occur. As a result, producing the good is associated with greater and greater trade-offs. The production of both goods rises. Given the labor and the capital available at both plants, it can produce the combinations of the two goods at the two plants shown. There are always participants in the market that are more efficient than you are in production. 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. Why does this happen? Which of the following is not a factor of production? c. Those goods and services with the lowest prices. Instead of the bowed-out production possibilities curve ABCD, we get a bowed-in curve, ABCD. d. Decrease and the equilibrium quantity of ice cream to decrease. Through detailed databases. According to the law of increasing opportunity costs, ? A. producing a combination of goods and services beyond the production possibilities curve c. There will be a leftward movement along the initial supply curve for monkey wrenches. The shape of the PPF depends on whether there are increasing, decreasing, or constant costs. Producing a snowboard in Plant 3 requires giving up just half a pair of skis. We shall examine the significance of the bowed-out shape of the curve in the next section. Increases as its price falls, ceteris paribus. They continued to fall for several years. At the same time, more and more wheat is lost. Want to create or adapt books like this? Once again, this is made possible because of trade-offs. According to the law of increasing opportunity costs: a. It had enjoyed seven years of dramatic growth and unprecedented prosperity. a. To find this quantity, we add up the values at the vertical intercepts of each of the production possibilities curves in Figure 2.4 Production Possibilities at Three Plants. Suppose a hurricane hits Florida causing widespread damage to houses and businesses. Works through central planning by government. If it fails to do that, it will operate inside the curve. Understanding this law can help you make decisions that lead to the highest returns for the business. The exhibit gives the slopes of the production possibilities curves for each plant. 20 hours/2 gallons is 10 gallons of wine per day. Results from a change in price of other goods. This is a difficult concept made simple using the PPF. d. Fewer units actually purchased. The law of increasing opportunity cost states that whenever the same resource allocation decision is made, the opportunity cost will increase. The demand for MP3 players increased from 2007 to 2008. Is not a very efficient means of communicating consumer demand to the producers of goods and services. A linear function can be distinguished by: We can think of each of Ms. Ryders three plants as a miniature economy and analyze them using the production possibilities model. Specialization implies that an economy is producing the goods and services in which it has a comparative advantage. Change in x coordinates between two points divided by the change in their y coordinates. Land, labor, or capital is bought and sold. Question: According to the law of increasing opportunity costs: A. d. There are not enough resources available to produce more output. The bowed-out curve of Figure 2.5 The Combined Production Possibilities Curve for Alpine Sports becomes smoother as we include more production facilities. c. An increase in income The exhibit gives the slopes of the production possibilities curves for each of the firms three plants. Much of the land in the United States has a comparative advantage in agricultural production and is devoted to that activity. 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. When economists talk about "optimal outcomes" in the marketplace, they mean that: The production-possibilities curve between tanks and automobiles will appear as a straight line. This curve depicts an entire economy that produces only skis and snowboards. a. If the price of pencils rises, then we will see: Quantity supplied because of a change in price. 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. You must produce everything you consume; you obtain nothing from anyone else. Production of all other goods and services falls by OA OB units per period. Well, some resources are better suited for some tasks than others. The U.S. economy looked very healthy in the beginning of 1929. Learn more about the Econ Lowdown Teacher Portal and watch a tutorial on how to use our online learning resources. An economy that fails to make full and efficient use of its factors of production will operate inside its production possibilities curve. d. Through trial and error. Producing 100 snowboards at Plant 2 would leave Alpine Sports producing 200 snowboards and 200 pairs of skis per month, at point C. If the firm were to switch entirely to snowboard production, Plant 1 would be the last to switch because the cost of each snowboard there is 2 pairs of skis. The second plant, while smaller than the first, was designed to produce snowboards as well as skis. Finished goods are bought and sold. Created by Sal Khan. If the quantity demanded of a good is greater than the quantity supplied of the good at the current price, a. Public-goods market. As for the benefits packages received by employees from the employers, approximately 33% are . The slope between points B and B is 2 pairs of skis/snowboard. 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. Output began to grow after 1933, but the economy continued to have vast numbers of idle workers, idle factories, and idle farms. Now to draw the PPF, create the x and y-axis, like the ones in the video. The governor of b. Markets necessarily have a physical location. a. It has not been edited for readability, and there may be slight differences between the text and the video. A. an increase in the working-age population b. Economists say that an economy has a comparative advantage in producing a good or service if the opportunity cost of producing that good or service is lower for that economy than for any other. 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. Assume that steel is used to produce monkey wrenches. Assume peanut butter and jelly are complements. Increase and the equilibrium quantity of jelly to decrease. Getting the most goods and services from the available resources, Which of the following will cause the production possibilities curve to shift inward? I hope you have enjoyed your journey to the frontier and learned some valuable lessons about economics along the way. d. The set of goods and services that maximizes their utility. 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. For this reason, the frontier is usually drawn as a curved line that is concave to the origin. The largest IT transaction of the quarter was EMC's $625\$ 625$625 million acquisition of VMWare. A decrease in the price of perfume Need the goods and services the most. It can produce skis and snowboards simultaneously as well. c. Higher equilibrium price. 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 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. 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. Assume that pencils and pens are substitutes. d. All of the above. c. Maintaining a strong level of economic growth. By 1933, more than 25% of the nations workers had lost their jobs. The production possibilities frontier shows the maximum combination of two types of goods that can be produced using all resources. d. Are willing to pay the highest price. The sensible thing for it to do is to choose the plant in which snowboards have the lowest opportunity costPlant 3. Plant 3s comparative advantage in snowboard production makes a crucial point about the nature of comparative advantage. d. Income. An economy cannot operate on its production possibilities curve unless it has full employment. Producing 1 additional snowboard at point B requires giving up 2 pairs of skis. The law also applies as the firm shifts from snowboards to skis. In drawing production possibilities curves for the economy, we shall generally assume they are smooth and bowed out, as in Panel (b). 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 bowed-out shape of the production possibilities curve illustrates the law of increasing opportunity cost. Here's where the curved frontier line comes in. And finally, the curved line of the frontier illustrates the law of increasing opportunity cost meaning that an increase in the production of one good brings about increasing losses of the other good because resources are not suited for all tasks. d. Find the difference between the quantity demanded and the quantity supplied at each price. If an economy is producing inside the production-possibilities curve, then: output is produced. a. b. The allocation of resources by the market is perfect. Plant 3 would be the last plant converted to ski production. d. Number of buyers, A shift in supply is defined as a change in: d. Factories are bought and sold. d. Bureaucratic delays, required use of pollution-control technologies that are obsolete, and inefficient incentives. These values are plotted in a production possibilities curve for Plant 1. Individual consumers supply ____ and purchase ____. The opportunity cost of moving from . Suppose Plant 1 is producing 100 pairs of skis and 50 snowboards per month at point B. The law of increasing opportunity cost states that when a company continues raising production its opportunity cost increases. c. Percentage change in y coordinates between two points divided by the percentage change in their x coordinates. To shift from B to B, Alpine Sports must give up two more pairs of skis per snowboard. An economys factors of production are scarce; they cannot produce an unlimited quantity of goods and services. The demand curve will shift to the left to create equilibrium. In 2007 a company sold 35,000 MP3 players at $150 each. c. The production-possibilities curve d. There will be a rightward movement along the initial supply curve for monkey wrenches. Find the average value VVV of the given function over the specified interval. Means a shortage or surplus will result from holding prices constant. a. In this case we have categories of goods rather than specific goods. This point shows widget production increased by 2, and this by 2 more, and this by 2 more, indicating all widgets and no gadgets. Intermediate goods; final goods and services c. Other things remain equal. In order to produce any good or service, it is necessary to have factors of production An increase in the demand for pens. More generally, the absolute value of the slope of any production possibilities curve at any point gives the opportunity cost of an additional unit of the good on the horizontal axis, measured in terms of the number of units of the good on the vertical axis that must be forgone. In our example, all three plants are equally good at snowboard production. As we combine the production possibilities curves for more and more units, the curve becomes smoother. It is operating efficiently. The Federal Reserve lowered interest rates at their last meeting. 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. Putting its factors of production to work allows a move to the production possibilities curve, to a point such as A. With all three of its plants producing skis, it can produce 350 pairs of skis per month (and no snowboards). Profits The business will net $2,000 in year 2 and $5,000 in all future years. c. Congress increased the minimum wage rate in January. People benefit by participating in the market because: I personally like having the large number in the y-axis, so I would label that lbs of candy. The prices of the factors of production b. d. Works because prices serve as a means of communication between consumers and producers. (Many students are helped when told to read this result as 2 pairs of skis per snowboard.) 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