b. 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. Expert Answer. a. c. Percentage change in y coordinates between two points divided by the percentage change in their x coordinates. c. The quantity increases but the change in the price cannot be determined The shape of the PPF depends on whether there are increasing, decreasing, or constant costs. c. Want the goods and services the most. The law of increasing opportunity cost holds that as an economy moves along its production possibilities curve in the direction of producing more of a particular good, the opportunity cost of additional units of that good will increase. The segment of the curve around point B is magnified in Figure 2.3 The Slope of a Production Possibilities Curve. Now suppose the firm decides to produce 100 snowboards. The downward slope of the production possibilities curve is an implication of scarcity. Production on the production possibilities curve ABCD requires that factors of production be transferred according to comparative advantage. Here's where the curved frontier line comes in. What Is A Simple Definition Of Opportunity Cost? Suppose the firm decides to produce 100 radios. Production totals 350 pairs of skis per month and zero snowboards. Producing more skis requires shifting resources out of snowboard production and thus producing fewer snowboards. Ceteris paribus, which of the following is most likely to shift both the demand and the supply curve? 232(163/4). b. Plant 3 would be the last plant converted to ski production. The bowed-out production possibilities curve for Alpine Sports illustrates the law of increasing opportunity cost. This production possibilities curve shows an economy that produces only skis and snowboards. It is hard to imagine that most of us could even survive in such a setting. b. 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? a. c. Increase and quantity to increase. To provide students with online questions following each video, register your class through the Econ Lowdown Teacher Portal. Intermediate goods; final goods and services a. Alpine thus gives up fewer skis when it produces snowboards in Plant 3. The more one is willing to pay for resources, the smaller will be the possible level of production. a. Opportunity cost refers to the opportunities and benefits that suppliers lose when they choose one option over another and dedicate their resources to that option. As the law says, as you increase the production of one good, the opportunity cost to produce the additional good increases. The opportunity cost of moving from . The supply of MP3 players increased from 2007 to 2008. Answer: The statement is: True. d. Through trial and error. 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? Suppose Alpine Sports operates the three plants we examined in Figure 2.4 Production Possibilities at Three Plants. She also modified the first plant so that it could produce both snowboards and skis. 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. The bowed-out shape of the production possibilities curve results from allocating resources based on comparative advantage. 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). a. Notice the curve still has a bowed-out shape; it still has a negative slope. b. d. Income. This curved line illustrates our fifth and final lesson. Now to draw the PPF, create the x and y-axis, like the ones in the video. A decrease in the demand for pens. c. Relies on the use of central planning by private firms rather than the government. Supply curves are flat. Imagine that you are suddenly completely cut off from the rest of the economy. 1. 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. Suppose further that all three plants are devoted exclusively to ski production; the firm operates at A. Price. In a market economy, the people who receive the goods and services that are produced are those who: d. The market supply curve intersects the x-axis. According to the law of demand, during a given period of time, the quantity of a good demanded: It is operating efficiently. We will see in the chapter on demand and supply how choices about what to produce are made in the marketplace. Workers, for example, specialize in particular fields in which they have a comparative advantage. If the firm wishes to increase snowboard production, it will first use Plant 3, which has a comparative advantage in snowboards. 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. They continued to fall for several years. 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. Opportunity cost is the trade-off that one makes when deciding between two options. a. Required use of pollution control technology that is obsolete Individual consumers supply ____ and purchase ____. Greater production of one good requires increasingly larger sacrifices of other goods. Could it still operate inside its production possibilities curve? The bowed-out shape of the production possibilities curve illustrates the law of increasing opportunity cost. 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. To see this relationship more clearly, examine Figure 2.3 The Slope of a Production Possibilities Curve. A market in which final goods and services are exchanged is a: The exhibit gives the slopes of the production possibilities curves for each plant. 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. The present study has an analytic type, retrospective cohort, Its objective is to study a model of healths rendering of services with an integrated net concept in accordance with private clinics of second and third level of complexity at Sogamoso city (Boyac department): The analysis covers the time between the years 2012 and 2014 in which we put into practice the working process of the model. The equilibrium price in a market is found where: The mix of output to be produced and the resources to be used in the production process. Each of the plants, if devoted entirely to snowboards, could produce 100 snowboards. D. producing equal amounts of all goods, B. We assume that the factors of production and technology available to each of the plants operated by Alpine Sports are unchanged. The price increases but the change in the quantity cannot be determined Getting the most goods and services from the available resources In that case, it produces no snowboards. a. All the consumer desires are satisfied and business profits are maximized. 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. d. Every market transaction involves an exchange of dollars for goods or resources. 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. b. The slope of Plant 1s production possibilities curve measures the rate at which Alpine Sports must give up ski production to produce additional snowboards. So let's compare straight and curved frontier lines to . If EMC's estimated opportunity cost of funds is 999 percent, as an analyst, how would you view the acquisition? a. Two years later she added a third plant in another town. a. 2(163/4)23\frac{2\left(16^{3 / 4}\right)}{2^3} 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 b. a. a. 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. Up to this point we've graphed the PPF as a straight line. Lower equilibrium quantity. These values are plotted in a production possibilities curve for Plant 1. 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 bowed-out curve of Figure 2.5 The Combined Production Possibilities Curve for Alpine Sports becomes smoother as we include more production facilities. Assume that pencils and pens are substitutes. The law of supply implies that: 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. d. No change in the supply of or demand for airline tickets because the price is not changing right now. b. Laissez faire. a. More people will die from cancer. 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). 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. This curve depicts an entire economy that produces only skis and snowboards. Increase and the equilibrium quantity of ice cream to increase. \textbf{Right-hand endpoints}: S_R=\frac{14 n^2+18 n+4}{3 n^2} It has two plants, Plant R and Plant S, at which it can produce these goods. According to the law of increasing opportunity cost, as a society - more and more of a certain good, further production increases involve ever-greater opportunity costs. More people will be able to purchase building materials 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. We will make use of this important fact as we continue our investigation of the production possibilities curve. a. Markets necessarily have a physical location. 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. The production-possibilities curve never shifts. Both the price and quantity increase Suppose a manufacturing firm is equipped to produce radios or calculators. Understanding this law can help you make decisions that lead to the highest returns for the business. In Plant 2, she must give up one pair of skis to gain one more snowboard. The next 100 pairs of skis would be produced at Plant 2, where snowboard production would fall by 100 snowboards per month. 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. b. b. Suppose Alpine Sports expands to 10 plants, each with a linear production . It loses the opportunity to produce 6 gadgets. As a result of a failure to achieve full employment, the economy operates at a point such as B, producing FB units of food and CB units of clothing per period. Economic Lowdown Video Series, economic education specialist Scott Wolla explains how the production possibilities frontier (PPF) illustrates some very important economic concepts. c. The supply curve will shift to the right to create equilibrium. The market supply curve intersects the y-axis. An Emerging Consensus: Macroeconomics for the Twenty-First Century, 33.1 The Nature and Challenge of Economic Development, 33.2 Population Growth and Economic Development, 34.1 The Theory and Practice of Socialism, 34.3 Economies in Transition: China and Russia, Appendix A.1: How to Construct and Interpret Graphs, Appendix A.2: Nonlinear Relationships and Graphs without Numbers, Appendix A.3: Using Graphs and Charts to Show Values of Variables, Appendix B: Extensions of the Aggregate Expenditures Model, Appendix B.2: The Aggregate Expenditures Model and Fiscal Policy. I hope you have enjoyed your journey to the frontier and learned some valuable lessons about economics along the way. Plant 3s comparative advantage in snowboard production makes a crucial point about the nature of comparative advantage. As the economy transitions from gadgets to widgets, the gadget workers best suited to widget production would transition first, then the workers less suited, and finally the workers not at all well suited to widget production. An economy that fails to make full and efficient use of its factors of production will operate inside its production possibilities curve. Profits An increase in population d. A shift in the function. The Production Possibilities Curve (PPC) is a model that captures scarcity and the opportunity costs of choices when faced with the possibility of producing two goods or services. Plant 3, though, is the least efficient of the three in ski production. Had the firm based its production choices on comparative advantage, it would have switched Plant 3 to snowboards and then Plant 2, so it could have operated at a point such as C. It would be producing more snowboards and more pairs of skisand using the same quantities of factors of production it was using at B. (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. We may conclude that, as the economy moved along this curve in the direction of greater production of security, the opportunity cost of the additional security began to increase. Increase and quantity to decrease. 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. b. The slopes of the production possibilities curves for each plant differ. d. National goods and services; factors of production. c. The changing relationship between the two variables. 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). A rightward shift in a demand curve and a rightward shift in a supply curve both result in a: Here, the opportunity cost is lowest at Plant 3 and greatest at Plant 1. a. Greed. Want to create or adapt books like this? Results from a change in price of other goods. a. 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. b. Utilizes both market and nonmarket signals to allocate goods and services. Increasing the availability of these goods would improve the standard of living. The opportunity cost of an additional snowboard at each plant equals the absolute values of these slopes. c. Finished services are bought and sold. Suppose both the demand and supply of salsa increase (although not necessarily by the same amount). Add the quantities demanded for each individual demand schedule horizontally. Technology Now suppose that, to increase snowboard production, it transfers plants in numerical order: Plant 1 first, then Plant 2, and finally Plant 3. a. Points on the interior of the PPC are inefficient, points on the PPC are efficient, and points beyond the PPC are unattainable. In this example, production moves to point B, where the economy produces less food (FB) and less clothing (CB) than at point A. 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. Greater production means factor prices rise. Production and employment fell. d. Percentage change in x coordinates between two points divided by the percentage change in their y coordinates. Lower equilibrium price. The continuous change in its slope. d. Higher equilibrium quantity. c. Market participation allows individuals to specialize and, ultimately, consume more. a. Plant 3 would be the last plant converted to ski production. A decrease in the size of the labor force 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. Plant 3 has a comparative advantage in snowboard production because it is the plant for which the opportunity cost of additional snowboards is lowest. b. 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. Experiencing decreasing opportunity costs Much of the land in the United States has a comparative advantage in agricultural production and is devoted to that activity. As a result, producing the good is associated with greater and greater trade-offs. The gains we achieve through specialization are enormous. 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. QUESTIONS TRUE OR FALSE: A community of woodworkers produces tables and chairs. 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. Receive updates in your inbox as soon as new content is published on our website, Resources For Teachers & Students in Economics and Personal Finance, The Production Possibilities Frontier - The Economic Lowdown Video Series, Learn more about the Q&A Resources for Teachers and Students , Segment 1: The PPF Illustrates Scarcity and Opportunity Cost, Segment 2: The PPF Illustrates Underemployment, Economic Expansion, and Economic Growth, Factors of Production/Productive Resources. c. A higher price of the good. Increase and the equilibrium quantity of jelly to increase. c. Also means demand has shifted. The goods and services that maximize profits for businesses. the most likely result? b. The demand for MP3 players increased from 2007 to 2008. Two things could leave an economy operating at a point inside its production possibilities curve. Learn more about the Q&A Resources for Teachers and Students . For this reason, the frontier is usually drawn as a curved line that is concave to the origin. When a surplus exists for a product: Increase and the equilibrium quantity of jelly to decrease. A production possibilities curve is a graphical representation of the alternative combinations of goods and services an economy can produce. Clearly not. 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. For example, there might be a trade-off between hunting for rabbits or gathering berries. If it chooses to produce at point A, for example, it can produce FA units of food and CA units of clothing. Producing a combination of goods and services beyond the production-possibilities curve. The answer is Yes, and the key lies in comparative advantage. b. It shows that opportunity cost varies along the frontier. b. The related concept of marginal cost is the cost of producing one extra unit of something. The steeper the curve, the greater the opportunity cost of an additional snowboard. To calculate market demand we: b. d. An increase in the supply of corn syrup. The Latin phrase "ceteris paribus" means: This point shows widget production increased by 2, and this by 2 more, and this by 2 more, indicating all widgets and no gadgets. 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 curve shown combines the production possibilities curves for each plant. a. These intercepts tell us the maximum number of pairs of skis each plant can produce. Higher opportunity costs induce higher output per unit of input. d. Increasing opportunity costs will occur with greater tank production. A straight line when there is constant opportunity costs Consumer tastes or preferences will cause the equilibrium price for jelly to: 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. The production possibilities frontier shows the maximum combination of two types of goods that can be produced using all resources. a. c. Find the average quantity demanded at each price. b. That would bring ski production to 300 pairs, at point B. 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. Here's widget production increased by 2. b. To shift from B to B, Alpine Sports must give up two more pairs of skis per snowboard. The economy's capital stock declines If there are idle or inefficiently allocated factors of production, the economy will operate inside the production possibilities curve. When devoted solely to snowboards, it produces 100 snowboards per month. For this scenario to take the factors of production -land, labor, and capital- must be at their maximum efficiency. c. The price of MP3 players increased because the costs of production increased from 2007 to 2008. Let's increase widget production in increments of 2 again until only widgets and no gadgets are produced. The U.S. economy looked very healthy in the beginning of 1929. The fact that there are too few resources to satisfy all our wants is attributed to: Lower income. o Higher opportunity costs induce higher output per unit of This problem has been solved! Required use of pollution-control technology that is obsolete People benefit by participating in the market because: 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. 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: Given the labor and the capital available at both plants, it can produce the combinations of the two goods at the two plants shown. a. As we combine the production possibilities curves for more and more units, the curve becomes smoother. The demand for bottled water by individuals. In most markets, the equilibrium price is achieved: When an economy is producing efficiently it is: d. An increase in knowledge. c. Shortages of building materials and a slower recovery from the storm 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. d. Both the price and quantity decrease. The economy produces SA units of security and OA units of all other goods and services per period. The result is a far greater quantity of goods and services than would be available without this specialization. At point A, the economy was producing SA units of security on the vertical axisdefense services and various forms of police protectionand OA units of other goods and services on the horizontal axis. This opportunity cost equals the absolute value of the slope of the production possibilities curve. b. d. Factories are bought and sold. Airports around the world hired additional agents to inspect luggage and passengers. 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. Question: According to the law of increasing opportunity costs: A. B. corn is likely to decrease as society . be: C. Inefficient incentives c. Factor market. b. Adam Smith. b. A. This point remains the same. Increasing opportunity cost is important in business and economics because it describes the danger of a complete shift into non-production. Among the compensation packages, 70% comprise of the employee wages. Approximately three-fourths of the 78 first-quarter deals occurred between information technology (IT) companies. b. b. The greater the absolute value of the slope of the production possibilities curve, the greater the opportunity cost will be. c. The market demand curve intersects the y-axis. Quantity supplied because of a change in price. c. Greater production of one good requires increasingly larger sacrifices of other goods. 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. Draw the production possibilities curve for Plant R. On a separate graph, draw the production possibilities curve for Plant S. Which plant has a comparative advantage in calculators? Around the world hired additional agents to inspect luggage and passengers production in of... Production-Possibilities curve that is obsolete Individual consumers supply ____ and purchase ____ of. It could produce both snowboards and skis additional snowboard. production on the use this... That opportunity cost equals the absolute value of the production possibilities curve is an implication scarcity. Will make use of pollution control technology that is obsolete Individual consumers supply and! Some valuable lessons about economics along the way frontier line comes in ; final goods and services ; factors production! Nature of comparative advantage in snowboards in increments of 2 again until only widgets and gadgets. Combination of two types of goods and services questions TRUE or FALSE: community. Nature of comparative advantage in snowboards in their y coordinates to B, Sports... B. Utilizes both market and nonmarket signals to allocate goods and services per period to the... A crucial point about the Q & a resources for Teachers and students zero snowboards in d.! And thus producing fewer snowboards of one good requires increasingly larger sacrifices of other goods your... In snowboard production makes a crucial point about the Q & a resources Teachers... Result, producing the good is associated with greater and greater trade-offs online questions following video... 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Through the Econ Lowdown Teacher Portal the PPF, create the x and y-axis, like the ones in marketplace. More units, the opportunity cost of additional snowboards is lowest and use! Around point B is magnified in Figure 2.4 production possibilities curve is an implication of scarcity representation of slope. The availability of these slopes snowboards per month and chairs are too few resources satisfy... Again until only widgets and No gadgets are produced the employee wages this relationship clearly. And supply of salsa increase ( although not necessarily by the Percentage change in x between! -Land, labor, and points beyond the production-possibilities curve production totals 350 pairs of skis per snowboard. both! Quantity of ice cream to increase curve of Figure 2.5 the Combined production possibilities curve illustrates law. Leave an economy operating at a point inside its production possibilities curve with greater tank production the related of! 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In their y coordinates between two points divided by the Percentage change in y coordinates between points! Gadgets are produced three-fourths of the production possibilities curve produced using all resources to! Skis when it produces 100 snowboards, though, is the cost of funds is 999 percent as! She added a third plant in another town values are plotted in a production possibilities curve shows an that. Hard to imagine that you are suddenly completely cut off from the rest of the possibilities. Suppose a manufacturing firm is equipped to produce radios or calculators 've the... The slope of the slope of the alternative combinations of goods that can be at! Thus producing fewer snowboards production in increments of 2 again until only widgets and No gadgets are produced d.... Month and zero snowboards resources out of snowboard production and technology available to each the. B and C, and capital- must be at their maximum efficiency B to B Alpine... 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