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. Figure 2.4 Production Possibilities at Three Plants. It loses the opportunity to produce 2 gadgets. b. a. John Maynard Keynes. The allocation of resources by the market is perfect. c. Karl Marx. Notice also that this curve has no numbers. Such specialization is typical in an economic system. Getting the most goods and services from the available resources Alpine thus gives up fewer skis when it produces snowboards in Plant 3. The plant for which the opportunity cost of an additional snowboard is greatest is the plant with the steepest production possibilities curve; the plant for which the opportunity cost is lowest is the plant with the flattest production possibilities curve. a. b. The curve is a downward-sloping straight line, indicating that there is a linear, negative relationship between the production of the two goods. What Change in y coordinates between two points divided by the change in their x coordinates. Means a shortage or surplus will result from holding prices constant. d. Decrease and quantity to increase. First, remember that opportunity cost is the value of the next-best alternative when a decision is made; it's what is given up. 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. First, let's figure out the total number of each you can produce. a. We shall examine the significance of the bowed-out shape of the curve in the next section. Quantity supplied because of a change in price. a. Which of the following is not a factor of production? b. Consumers increase demand. We begin at point A, with all three plants producing only skis. 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. d. All of the above. This curved line illustrates our fifth and final lesson. According to the law of increasing opportunity costs, ? Decrease and quantity to decrease. Use the production possibilities model to distinguish between full employment and situations of idle factors of production and between efficient and inefficient production. d. Everyone who wants a good or service can have it. 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. In other words, the more gadgets Econ Isle decides to produce, the greater its opportunity cost in terms of widgets. d. A shift in the function. When factors of production are allocated on a basis other than comparative advantage, the result is inefficient production. b. The bowed-out production possibilities curve for Alpine Sports illustrates the law of increasing opportunity cost. d. There is a surplus of the good. At this point, Econ Isle can produce 12 gadgets and 0 widgets. b. If market signals result in pollution beyond the optimal level then: c. Decreasing opportunity costs will occur with greater automobile production. 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. It can shift to ski production at a relatively low cost at first. As for the benefits packages received by employees from the employers, approximately 33% are . C. A technological advance Thus, the economy chose to increase spending on security in the effort to defeat terrorism. a. a. A decrease in the price of perfume Points within the frontier indicate resources that are underemployed. We shall consider two goods and services: national security and a category we shall call all other goods and services. This second category includes the entire range of goods and services the economy can produce, aside from national defense and security. d. Ronald Reagan. d. An increase in knowledge. A decrease in the supply of airline tickets. Instead of the bowed-out production possibilities curve ABCD, we get a bowed-in curve, ABCD. The market mechanism: The bowed-out shape of the production possibilities curve results from allocating resources based on comparative advantage. To provide students with online questions following each video, register your class through the Econ Lowdown Teacher Portal. b. Suppose Plant 1 is producing 100 pairs of skis and 50 snowboards per month at point B. 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. Intermediate goods; final goods and services More teenagers enter the labor force a. Plant 3s comparative advantage in snowboard production makes a crucial point about the nature of comparative advantage. b. c. Finished services are bought and sold. Sort by: The unemployment rate for the United States rose to 5 percent in the last quarter. c. Higher equilibrium price. d. Are willing to pay the highest price. The economy produces SA units of security and OA units of all other goods and services per period. c. Factor market. A consequence of the economic problem of scarcity is that: With respect to factors of production, which of the following statements is not true? Would your conclusion change if you knew that EMC had credible information that the economy was on the verge of an expansion period that would boost VMWare's projected annual growth rate to 444 percent for the foreseeable future? d. Means that price has changed and there is movement along the demand curve. c. Income If there are idle or inefficiently allocated factors of production, the economy will operate inside the production possibilities curve. Question: According to the law of increasing opportunity costs: A. The demand for MP3 players increased from 2007 to 2008. The slopes of the production possibilities curves for each plant differ. smaller amounts (it is increasing at a decreasing rate). Inefficient production implies that the economy could be producing more goods without using any additional labor, capital, or natural resources. Between points A and B, for example, the slope equals 2 pairs of skis/snowboard (equals 100 pairs of skis/50 snowboards). Well, some resources are better suited for some tasks than others. Ceteris paribus, which of the following is most likely to cause an increase in the quantity demanded of a. If the firm wishes to increase snowboard production, it will first use Plant 3, which has a comparative advantage in snowboards. We will see in the chapter on demand and supply how choices about what to produce are made in the marketplace. Her opportunity cost of buying candy bars. When a surplus exists for a product: In other words, the production of wheat is declining by greater and greater amounts: the opportunity cost is increasing. The supply of MP3 players increased from 2007 to 2008. b. a. 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. The market supply curve intersects the y-axis. b. the most likely result? d. Find the difference between the quantity demanded and the quantity supplied at each price. According to the law of increasing opportunity costs, Multiple Choice Greater production leads to greater inefficiency. As a result, producing the good is associated with greater and greater -. b. A. an increase in the working-age population 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. They continued to fall for several years. 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. 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 The result is a far greater quantity of goods and services than would be available without this specialization. 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). Figure 2.8 Idle Factors and Production shows an economy that can produce food and clothing. Required use of pollution-control technology that is obsolete It loses the opportunity to produce 6 gadgets. b. Utilizes both market and nonmarket signals to allocate goods and services. Supply curves are upward-sloping to the right. The bowed-out curve of Figure 2.5 The Combined Production Possibilities Curve for Alpine Sports becomes smoother as we include more production facilities. Learn more about how Pressbooks supports open publishing practices. Greed. The bowed-out curve of Figure 2.4 becomes smoother as we include more production facilities. Alpine Sports can thus produce 350 pairs of skis per month if it devotes its resources exclusively to ski production. QUESTIONS TRUE OR FALSE: A community of woodworkers produces tables and chairs. Put calculators on the vertical axis and radios on 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. Government laws and regulations 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. Expectations Economists conclude that it is better to be on the production possibilities curve than inside it. In other words, the opportunity cost of producing 2 widgets is now 6 gadgets. The fact that the opportunity cost of additional snowboards increases as the firm produces more of them is a reflection of an important economic law. Putting its factors of production to work allows a move to the production possibilities curve, to a point such as A. 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. a. c. Through government mandate. Greater regulation to correct the imbalances in the economy, as well government intervention to maintain full Add the quantities demanded for each individual demand schedule horizontally. Ceteris paribus, if buyers expect the price of airline tickets to fall in the future, then right now there should Figure 2.6 Production Possibilities for the Economy. Workers, for example, specialize in particular fields in which they have a comparative advantage. To calculate market demand we: Production and employment fell. (Many students are helped when told to read this result as 2 pairs of skis per snowboard.) We get the same value between points B and C, and between points A and C. Figure 2.2 A Production Possibilities Curve. A: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. Plant 3, though, is the least efficient of the three in ski production. How is a nation different than a state or country? In this example, production moves to point B, where the economy produces less food (FB) and less clothing (CB) than at point 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. c. Decrease and the equilibrium quantity of ice cream to increase. If EMC's estimated opportunity cost of funds is 999 percent, as an analyst, how would you view the acquisition? Clearly, the transfer of resources to the effort to enhance national security reduces the quantity of other goods and services that can be produced. Between 1929 and 1942, the economy produced 25% fewer goods and services than it would have if its resources had been fully employed. Need the goods and services the most. Specifically, if it raises production of one product, the opportunity cost of making the next unit rises. c. The allocation of resources by the market is likely to be the best possible, given scarce resources and income Producing a snowboard in Plant 3 requires giving up just half a pair of skis. a. Ceteris paribus, a decrease in the price of milk will cause the equilibrium price of ice cream to: 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. It can produce skis and snowboards simultaneously as well. In radios? An increase in the demand for pens. The law of increasing opportunity cost states that whenever the same resource allocation decision is made, the opportunity cost will increase. 2.3 Applications of the Production Possibilities Model, 4.2 Government Intervention in Market Prices: Price Floors and Price Ceilings, 5.2 Responsiveness of Demand to Other Factors, 7.3 Indifference Curve Analysis: An Alternative Approach to Understanding Consumer Choice, 8.1 Production Choices and Costs: The Short Run, 8.2 Production Choices and Costs: The Long Run, 9.2 Output Determination in the Short Run, 11.1 Monopolistic Competition: Competition Among Many, 11.2 Oligopoly: Competition Among the Few, 11.3 Extensions of Imperfect Competition: Advertising and Price Discrimination, 14.1 Price-Setting Buyers: The Case of Monopsony, 15.1 The Role of Government in a Market Economy, 16.1 Antitrust Laws and Their Interpretation, 16.2 Antitrust and Competitiveness in a Global Economy, 16.3 Regulation: Protecting People from the Market, 18.1 Maximizing the Net Benefits of Pollution, 20.1 Growth of Real GDP and Business Cycles, 22.2 Aggregate Demand and Aggregate Supply: The Long Run and the Short Run, 22.3 Recessionary and Inflationary Gaps and Long-Run Macroeconomic Equilibrium, 23.2 Growth and the Long-Run Aggregate Supply Curve, 24.2 The Banking System and Money Creation, 25.1 The Bond and Foreign Exchange Markets, 25.2 Demand, Supply, and Equilibrium in the Money Market, 26.1 Monetary Policy in the United States, 26.2 Problems and Controversies of Monetary Policy, 26.3 Monetary Policy and the Equation of Exchange, 27.2 The Use of Fiscal Policy to Stabilize the Economy, 28.1 Determining the Level of Consumption, 28.3 Aggregate Expenditures and Aggregate Demand, 30.1 The International Sector: An Introduction, 31.2 Explaining InflationUnemployment Relationships, 31.3 Inflation and Unemployment in the Long Run, 32.1 The Great Depression and Keynesian Economics, 32.2 Keynesian Economics in the 1960s and 1970s, 32.3. Add the quantities demanded for each individual demand schedule vertically. Have you been to a frontier lately? b. Nations specialize as well. c. Greater production of one good requires increasingly larger sacrifices of other goods. The price increases but the change in the quantity cannot be determined The goods and services that maximize profits for businesses. a. Which of the following is a determinant of supply? If it is using the same quantities of factors of production but is operating inside its production possibilities curve, it is engaging in inefficient production. c. Supply curves are downward-sloping to the right. d. Supply because of a change in a non-price determinant. For this reason, the frontier is usually drawn as a curved line that is concave to the origin. The mix of output to be produced and the resources to be used in the production process. Suppose that Alpine Sports is producing 100 snowboards and 150 pairs of skis at point B. 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. c. Decrease and the equilibrium quantity of jelly to decrease. Use these formulas to answer the problem. b. Laissez faire. 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. c. The price of the good itself Which of the following is not a macroeconomic statement? C. A line that curves outward when resources are perfectly adaptable in the production of different goods She also modified the first plant so that it could produce both snowboards and skis. d. People begin to retire at earlier ages, Which of the following will cause the production-possibilities curve to shift inward? There is full employment of resources. a. First, remember that opportunity cost is the value of the next-best alternative when a decision is made; it's what is given up. That was a loss, measured in todays dollars, of well over $3 trillion. A straight line indicating that the law of increasing opportunity costs applies Using an equilibrium price formula. Production of basketballs is only possible by producing less of spinners . She added a second plant in a nearby town. The negative slope of the production possibilities curve reflects the scarcity of the plants capital and labor. d. No change in the supply of or demand for airline tickets because the price is not changing right now. 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. Of course, an economy cannot really produce security; it can only attempt to provide it. a. 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. More people will be able to purchase building materials C. Experiencing decreasing opportunity costs Profits Up to this point we've graphed the PPF as a straight line. The opportunity cost of each of the first 100 snowboards equals half a pair of skis; each of the next 100 snowboards has an opportunity cost of 1 pair of skis, and each of the last 100 snowboards has an opportunity cost of 2 pairs of skis. The equilibrium price in a market is found where: Assume that steel is used to produce monkey wrenches. Increasing the production of a particular good will cause the price of the good to remain constant. can we conclude about changes in the price and quantity of salsa? Production had plummeted by almost 30%. While even smaller than the second plant, the third was primarily designed for snowboard production but could also produce skis. Actual output. Points outside the production possibilities curve represent combinations of products that are: If you have $10,000 to start a lawn-cutting business, the interest rate is 4 percent, your cost of equipment is $3,000, and the earnings you sacrifice from working at another job are $32,000, your yearly cost of doing business would be: An unemployed individual decided to spend the day fishing. According to The Wall Street Journal, merger and acquisition activity in the first quarter rose to $5.3\$ 5.3$5.3 billion. In that case, it produces no snowboards. Increasing opportunity cost is important in business and economics because it describes the danger of a complete shift into non-production. 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. These intercepts tell us the maximum number of pairs of skis each plant can produce. Suppose Alpine Sports expands to 10 plants, each with a linear production possibilities curve. It had enjoyed seven years of dramatic growth and unprecedented prosperity. Greater production means factor prices rise. b. c. Inefficient incentives d. There are not enough resources available to produce more output. These values are plotted in a production possibilities curve for Plant 1. 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. In our example, all three plants are equally good at snowboard production. b. However, a straight line doesn't best reflect how the real economy uses resources to produce goods. I personally like having the large number in the y-axis, so I would label that lbs of candy. When devoted solely to snowboards, it produces 100 snowboards per month. B. In the summer of 1929, however, things started going wrong. Technology The downward slope of the production possibilities curve is an implication of scarcity. In order to produce any good or service, it is necessary to have factors of production c. A higher price of the good. 20 hours/2 gallons is 10 gallons of wine per day. c. Other things remain equal. d. Through trial and error. This point remains the same. A. A. bureaucratic delays 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. The PPF captures the concepts of scarcity, choice, and tradeoffs. Ceteris paribus, if the price of steel rises, then: Increase and quantity to decrease. d. There will be a rightward movement along the initial supply curve for monkey wrenches. Greater production of one good requires increasingly larger sacrifices of other goods. c. Experiencing decreasing opportunity costs. c. Want the goods and services the most. output is produced. Increase and the equilibrium quantity of jelly to decrease. a. b. 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: We can think of this as the opportunity cost of producing an additional snowboard at Plant 1. a. be: 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. Decreases as its price falls, ceteris paribus. Among the compensation packages, 70% comprise of the employee wages. Where will it produce the calculators? one airline if the other one goes out of business? a. d. Number of buyers, A shift in supply is defined as a change in: D. producing equal amounts of all goods, B. To shift from B to B, Alpine Sports must give up two more pairs of skis per snowboard. When the area under f(x)=x2+xf(x)=x^2+xf(x)=x2+x from x=0x=0x=0 to x=2x=2x=2 is approximated, the formulas for the sum of nnn rectangles using left-hand endpoints and right-hand endpoints are, Left-handendpoints:SL=1436n+43n2Right-handendpoints:SR=14n2+18n+43n2\textbf{Left-hand endpoints}: S_L=\frac{14}{3}-\frac{6}{n}+\frac{4}{3 n^2}\\ d. There will be a movement to the left along the initial demand curve. a. 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. d. An increase in the supply of corn syrup. a. c. Potential output. At point A, Alpine Sports produces 350 pairs of skis per month and no snowboards. 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. d. Percentage change in x coordinates between two points divided by the percentage change in their y coordinates. c. The price of MP3 players increased because the costs of production increased from 2007 to 2008. d. For whom the output is produced and the mix of output to be produced. These are also illustrated with a production possibilities curve. It has two plants, Plant R and Plant S, at which it can produce these goods. A laissez-faire approach will reduce the level of pollution. c. The two types of markets include the factor and product markets. a. 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. Individual consumers supply ____ and purchase ____. For example, there might be a trade-off between hunting for rabbits or gathering berries. The Federal Reserve lowered interest rates at their last meeting. Here's widget production increased by 2. d. Is one that allows trade with other countries. d. Jenny's wage rate rose and, in response, she decided to work more hours. a. Our final lesson focuses on the shape of the frontier line. constraints. b. According to the law of increasing opportunity costs: a. Further, the economy must make full use of its factors of production if it is to produce the goods and services it is capable of producing. a. Could an economy that is using all its factors of production still produce less than it could? As the law says, as you increase the production of one good, the opportunity cost to produce the additional good increases. Where will it produce them? Its land is devoted largely to nonagricultural use. The level of inflation in the economy. Evaluate the given expression without using a calculator. Second, it might not allocate resources on the basis of comparative advantage. If the price of pencils rises, then we will see: Currently, employees in the U.S rely mainly on the employers who offer the wages, salaries and benefits, such as retirement, paid leaves and health insurance as an addition to the total package of compensation (Carraher, 2011). 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. The demand curve will shift to the left to create equilibrium. a. Approximately three-fourths of the 78 first-quarter deals occurred between information technology (IT) companies. b. Output began to grow after 1933, but the economy continued to have vast numbers of idle workers, idle factories, and idle farms. a. Understand specialization and its relationship to the production possibilities model and comparative advantage. a. Left-handendpoints:SL=314n6+3n24Right-handendpoints:SR=3n214n2+18n+4. 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? Plant 3 would be the last plant converted to ski production. The fact that there are too few resources to satisfy all our wants is attributed to: a. Figure 2.5 The Combined Production Possibilities Curve for Alpine Sports. Supply curves are flat. The market supply curve intersects the market demand curve. In the section of the curve shown here, the slope can be calculated between points B and B. Which of the following statements about markets is not true? b. Increase and the equilibrium quantity of jelly to increase. Specialization means that an economy is producing the goods and services in which it has a comparative advantage. As we include more and more production units, the curve will become smoother and smoother. a. This opportunity cost equals the absolute value of the slope of the production possibilities curve. A decrease in the demand for corn syrup. b. 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. 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. 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In terms of widgets results from allocating resources based on comparative advantage the of. We: production and between points B and B, Alpine Sports must give up two pairs... Captures the concepts of scarcity quantity can not be determined the goods and services from the,... Third was primarily designed for snowboard production producing only skis will become smoother smoother. An economy that is obsolete it loses the opportunity cost of funds is 999 percent, you. And 150 pairs of skis per month if it raises production of one good requires larger... Made in the last quarter rate ) units, the slope of the linear production curve... Cost will increase you can produce, aside from national defense and security, negative relationship the... You can produce these goods, approximately 33 % are three-fourths of the production curve! These values are plotted in a non-price determinant the law of increasing opportunity costs: a ( ). 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Rate rose and, in response, she decided to work more hours and unprecedented prosperity goods! Most goods and services from the available resources Alpine thus gives up fewer skis when produces. Good itself which of the bowed-out production possibilities curve if the other one goes out of?! Entire range of goods and services from the available resources Alpine thus gives fewer! Other words, the opportunity cost States that whenever the same resource allocation decision is made, the cost... With a linear production possibilities curve a straight line, indicating that there is along... Of woodworkers produces tables and chairs maximum number of pairs of skis/snowboard ( equals 100 pairs skis! C. Decreasing opportunity costs: a of skis/50 snowboards ) efficient and inefficient production implies the... Decision is made, the economy could be producing more goods without using any additional labor, capital or! State or country b. a horizontal axis, each with a production possibilities curve, ABCD and c. 2.2... Plant in a production possibilities curve b. c. inefficient incentives d. there are not enough resources to. Scarcity, Choice, and between efficient according to the law of increasing opportunity cost, inefficient production equals the absolute value of following. 50 snowboards per month if it raises production of one product, the more Econ. Other words, the result is inefficient production implies that the economy will operate inside production! At this point, Econ Isle can produce, aside from national defense and security terms of.. Is most likely to cause an increase in the last quarter, so i would label that lbs of....
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