The bowed-out curve of Figure 2.4 becomes smoother as we include more production facilities. The economy experiences government failure. Interactive map of the Federal Open Market Committee, Regular review of community and economic development issues, Podcast about advancing a more inclusive and equitable economy, Interesting graphs using data from our free economic database, Conversations with experts on their research and topics in the news, Podcast featuring economists and others making their marks in the field, Economic history from our digital library, Scholarly research on monetary policy, macroeconomics, and more. Suppose that at the time of the acquisition a weak economy led many analysts to project that VMWare's profits would grow at a constant rate of 222 percent for the foreseeable future, and that the company's annual net income was $39.60\$ 39.60$39.60 million. b. The table in Figure 2.2 A Production Possibilities Curve gives three combinations of skis and snowboards that Plant 1 can produce each month. 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. 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. The production-possibilities curve between tanks and automobiles will shift outward. Increasing the production of a particular good will cause the price of the good to remain constant. 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. Bureaucratic delays Why does this happen? d. Why she likes candy bars. a. Figure 2.8 Idle Factors and Production shows an economy that can produce food and clothing. We will generally draw production possibilities curves for the economy as smooth, bowed-out curves, like the one in Panel (b). Once again, this is made possible because of trade-offs. One, of course, was increased defense spending. d. All of the above. D. a line that curves inward when resources are perfectly adaptable in the production of different goods, B. The Great Depression was a costly experience indeed. Figure 2.9 Efficient Versus Inefficient Production. c. The price of MP3 players increased because the costs of production increased from 2007 to 2008. A linear function can be distinguished by: b. employment was associated primarily with the work of: B. We will see in the chapter on demand and supply how choices about what to produce are made in the marketplace. 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. The shape of the PPF depends on whether there are increasing, decreasing, or constant costs. What 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. Local and state governments also increased spending in an effort to prevent terrorist attacks. How is a nation different than a state or country? Here's widget production increased by another 2. 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. c. Also means demand has shifted. Ceteris paribus, which of the following is most likely to cause an increase in the quantity demanded of d. An increase in knowledge. c. Decreasing opportunity costs will occur with greater automobile 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. a. In 2008 the same company sold 40,000 MP3 A. A decrease in the supply of corn syrup. It illustrates the production possibilities model. a. People benefit by participating in the market because: 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: The plant with the lowest opportunity cost of producing snowboards is Plant 3; its slope of 0.5 means that Ms. Ryder must give up half a pair of skis in that plant to produce an additional snowboard. 1. The demand curve will shift to the left 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. In radios? B. 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 a manufacturing firm is equipped to produce radios or calculators. An economy that fails to make full and efficient use of its factors of production will operate inside its production possibilities curve. Left-handendpoints:SL=314n6+3n24Right-handendpoints:SR=3n214n2+18n+4. 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. 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. A decrease in the demand for corn syrup. Its downward slope reflects scarcity. a. Economic Lowdown Video Series, economic education specialist Scott Wolla explains how the production possibilities frontier (PPF) illustrates some very important economic concepts. According to the law of demand, during a given period of time, the quantity of a good demanded: b. c. The production-possibilities curve Production had plummeted by almost 30%. c. Percentage change in y coordinates between two points divided by the percentage change in their x coordinates. 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. According to the law of increasing opportunity costs, ? The supply curve for monkey wrenches will shift to the left. c. Market participation allows individuals to specialize and, ultimately, consume more. Put calculators on the vertical axis and radios on the horizontal axis. 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. 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? a. But the production possibilities model points to another loss: goods and services the economy could have produced that are not being produced. 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. b. We will make use of this important fact as we continue our investigation of the production possibilities curve. b. The fact that there are too few resources to satisfy all our wants is attributed to: 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. The decision to devote more resources to security and less to other goods and services represents the choice we discussed in the chapter introduction. Could an economy that is using all its factors of production still produce less than it could? Getting the most goods and services from the available resources, Which of the following will cause the production possibilities curve to shift inward? In other words, the production of wheat is declining by greater and greater amounts: the opportunity cost is increasing. Change in y coordinates between two points divided by the change in their x coordinates. At point A, Alpine Sports produces 350 pairs of skis per month and no snowboards. Increase and the equilibrium quantity of jelly to decrease. I personally like having the large number in the y-axis, so I would label that lbs of candy. Here, the opportunity cost is lowest at Plant 3 and greatest at Plant 1. Finished goods are bought and sold. She also modified the first plant so that it could produce both snowboards and skis. d. Participants in the market do not have to make choices. Assume that steel is used to produce monkey wrenches. Production of basketballs is only possible by producing less of spinners . Suppose the first plant, Plant 1, can produce 200 pairs of skis per month when it produces only skis. Plant 3 has a comparative advantage in snowboard production because it is the plant for which the opportunity cost of additional snowboards is lowest. For example, there might be a trade-off between hunting for rabbits or gathering berries. c. Want the goods and services the most. b. 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). 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. Through detailed databases. 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. 6*20 = 120 lbs of candy per day. The points on a production-possibilities curve show: Add the quantities demanded for each individual demand schedule horizontally. The exhibit gives the slopes of the production possibilities curves for each of the firms three plants. Increases as its price falls, ceteris paribus. a. Videos showing how the St. Louis Fed amplifies the voices of Main Street, Research and ideas to promote an economy that works for everyone, Insights and collaborations to improve underserved communities, Federal Reserve System effort around the growth of an inclusive economy, Quarterly trends in average family wealth and wealth gaps, Preliminary research to stimulate discussion, Summary of current economic conditions in the Eighth District. The reason for the law of increasing opportunity cost is due to the fact that some resources are not well suited for Also, I guess that the law of increasing opportunity cost is the opposite of economies of scale. c. The quantity increases but the change in the price cannot be determined More people will be able to purchase building materials b. c. Karl Marx. Now suppose that a large fraction of the economys workers lose their jobs, so the economy no longer makes full use of one factor of production: labor. A. the production possibilities curve between tanks and automobiles will appear as a straight line If an economy is fully utilizing its resources, it can produce more of one product only if it: According to the law of increasing opportunity costs, C. In order to produce additional units of a particular good, it is necessary for society to sacrifice increasingly larger amounts of alternative goods, If the United States decided 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 Each of the plants, if devoted entirely to snowboards, could produce 100 snowboards. 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. First, remember that opportunity cost is the value of the next-best alternative when a decision is made; it's what is given up. C. Experiencing decreasing opportunity costs 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. 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). perfume? Two things could leave an economy operating at a point inside its production possibilities curve. 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. Plant R has a comparative advantage in producing calculators. As we combine the production possibilities curves for more and more units, the curve becomes smoother. Inefficient production implies that the economy could be producing more goods without using any additional labor, capital, or natural resources. Works through central planning by government. c. How many candy bars she will actually buy. 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. There are always participants in the market that are more efficient than you are in production. a. c. Find the average quantity demanded at each price. c. The supply curve will shift to the right to create equilibrium. The economy had moved well within its production possibilities curve. c. There will be a movement to the right along the initial demand curve Thus, the economy chose to increase spending on security in the effort to defeat terrorism. The greatest number of goods and services possible. d. For whom the output is produced and the mix of output to be produced. Although the production possibilities frontierthe PPFis a simple economic model, it's a great tool for illustrating some very important economic lessons: The frontier line illustrates scarcitybecause it shows the limits of how much can be produced with the given resources. Figure 2.5 The Combined Production Possibilities Curve for Alpine Sports. Increases as its price rises, ceteris paribus. Of course, an economy cannot really produce security; it can only attempt to provide it. the opportunity cost of fishing is: B. Plants 2 and 3, if devoted exclusively to ski production, can produce 100 and 50 pairs of skis per month, respectively. The demand curve will shift to the right c. Finished services are bought and sold. a. We begin at point A, with all three plants producing only skis. 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. 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. In the summer of 1929, however, things started going wrong. d. Jenny's wage rate rose and, in response, she decided to work more hours. That will require shifting one of its plants out of ski production. d. A change in a determinant of demand shifts the supply curve. Results from a change in price of other goods. c. Those goods and services with the lowest prices. An increase in population c. The mix of output to be produced, the resources to be used in the production process, and for whom the Greater production of one good requires increasingly larger sacrifices of other goods. c. Maintaining a strong level of economic growth. a. Our final lesson focuses on the shape of the frontier line. c. Decreases as its price falls, ceteris paribus. We can think of each of Ms. Ryders three plants as a miniature economy and analyze them using the production possibilities model. The downward slope of the production possibilities curve is an implication of scarcity. 2(163/4)23\frac{2\left(16^{3 / 4}\right)}{2^3} If the quantity demanded of a good is greater than the quantity supplied of the good at the current price, b. Utilizes both market and nonmarket signals to allocate goods and services. First, the economy might fail to use fully the resources available to it. Approximately three-fourths of the 78 first-quarter deals occurred between information technology (IT) companies. The law of supply implies that: 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 intercepts tell us the maximum number of pairs of skis each plant can produce. C. Decreasing opportunity costs will occur with greater auto mobile production The production possibilities frontier shows the maximum combination of two types of goods that can be produced using all resources. d. National goods and services; factors of production. 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. c. Inefficient incentives The second plant, while smaller than the first, was designed to produce snowboards as well as skis. Thus, the production possibilities curve not only shows what can be produced; it provides insight into how goods and services should be produced. The market supply curve intersects the y-axis. How much she likes candy bars. a. Resources are no longer limited. The same slope throughout the line. A production possibilities curve is a graphical representation of the alternative combinations of goods and services an economy can produce. Lower equilibrium quantity. d. Bureaucratic delays, required use of pollution-control technologies that are obsolete, and inefficient incentives. Understanding this law can help you make decisions that lead to the highest returns for the business. 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. This straight frontier line indicates a constant opportunity cost. C. Suppose Alpine Sports expands to 10 plants, each with a linear production possibilities curve. Airports around the world hired additional agents to inspect luggage and passengers. b. Explain the concept of the production possibilities curve and understand the implications of its downward slope and bowed-out shape. A lower quantity demanded of a good reflects, ceteris paribus: Which of the following is an example of government failure? In Plant 2, she must give up one pair of skis to gain one more snowboard. Required use of pollution control technology that is obsolete This is a difficult concept made simple using the PPF. A. The economy's capital stock declines 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. d. The set of goods and services that maximizes their utility. 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. b. a. The attempt to provide it requires resources; it is in that sense that we shall speak of the economy as producing security. Now suppose that, to increase snowboard production, it transfers plants in numerical order: Plant 1 first, then Plant 2, and finally Plant 3. c. The price of the good itself The largest IT transaction of the quarter was EMC's $625\$ 625$625 million acquisition of VMWare. 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 production of both goods rises. b. 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. In Panel (a) we have a combined production possibilities curve for Alpine Sports, assuming that it now has 10 plants producing skis and snowboards. 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. Plant 3 would be the last plant converted to ski production. Answer: The statement is: True. The increase in resources devoted to security meant fewer other goods and services could be produced. An increase in the demand for pens. Producing 1 additional snowboard at point B requires giving up 2 pairs of skis. 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 In a market economy, the people who receive the goods and services that are produced are those who: The allocation of resources by the market is perfect. It suggests that to obtain efficiency in production, factors of production should be allocated on the basis of comparative advantage. Well, some resources are better suited for some tasks than others. Greater production means factor prices rise. All the consumer desires are satisfied and business profits are maximized. d. People begin to retire at earlier ages, Which of the following will cause the production-possibilities curve to shift inward? 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. output is produced. Quantity supplied because of a change in price. b. a. Between points A and B, for example, the slope equals 2 pairs of skis/snowboard (equals 100 pairs of skis/50 snowboards). The resources to be used in the production process and for whom the output is produced. Jessie's demand schedule for candy bars indicates: can we conclude about changes in the price and quantity of salsa? Suppose a hurricane hits Florida causing widespread damage to houses and businesses. Greater regulation to correct the imbalances in the economy, as well government intervention to maintain full The exhibit gives the slopes of the production possibilities curves for each plant. Use these formulas to answer the problem. b. b. Figure 2.6 Production Possibilities for the Economy. The economy produces SA units of security and OA units of all other goods and services per period. When devoted solely to snowboards, it produces 100 snowboards per month. Have the most political power. then: Want to create or adapt books like this? Points on the interior of the PPC are inefficient, points on the PPC are efficient, and points beyond the PPC are unattainable. one airline if the other one goes out of business? The law of increasing opportunity cost states that when a company continues raising production its opportunity cost increases. First, remember that opportunity cost is the value of the next-best alternative when a decision is made; it's what is given up. b. Plant 3 would be the last plant converted to ski production. It shows that Econ Isle can produce a maximum of 12 gadgets and 6 widgets or any other combination along the line. d. There will be a movement to the left along the initial demand curve. The prices of the factors of production c. The market mechanism has failed to achieve social efficiency. We can use the production possibilities model to examine choices in the production of goods and services. Higher opportunity costs induce higher output per unit of input. 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. be: d. A shift in the function. b. Technology Production and employment fell. To see this relationship more clearly, examine Figure 2.3 The Slope of a Production Possibilities Curve. c. Government purchases decrease. As a result, producing the good is associated with greater and greater -. 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. The more one is willing to pay for resources, the smaller will be the possible level of production. c. Factor market. Greater production means factor prices rise. 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. In applying the model, we assume that the economy can produce two goods, and we assume that technology and the factors of production available to the economy remain unchanged. players at $170 each. The law also applies as the firm shifts from snowboards to skis. The slope between points B and B is 2 pairs of skis/snowboard. If all the factors of production that are available for use under current market conditions are being utilized, the economy has achieved full employment. d. Decrease and the equilibrium quantity of jelly to increase. Nations specialize as well. A change in demand means there has been a shift in the demand curve, and a change in quantity demanded: Plant 3s comparative advantage in snowboard production makes a crucial point about the nature of comparative advantage. B. a. Desired output. Economists conclude that it is better to be on the production possibilities curve than inside it. For this scenario to take the factors of production -land, labor, and capital- must be at their maximum efficiency. 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. In other words, the opportunity cost of producing 2 widgets is now 4 gadgets. Here's where the curved frontier line comes in. A factor market is any place where: For example, many Econ Isle workers are likely very productive gadget makers. In other words, the opportunity cost of producing 2 widgets is now 6 gadgets. Fewer people will die from cancer. 232(163/4). b. b. This curved line illustrates our fifth and final lesson. , if devoted exclusively to ski production, factors of production -land, labor, points! Many candy bars indicates: can we conclude about changes in the market has... Of spinners or constant costs a result, producing the good is associated with greater and greater:... This straight frontier line indicates a constant opportunity cost of additional snowboards is lowest: Want to create adapt..., however, things started going wrong it can only attempt to provide it goods. Widgets is now 4 gadgets are efficient, and points beyond the PPC are unattainable available to it National and. 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