If EMC's estimated opportunity cost of funds is 999 percent, as an analyst, how would you view the acquisition? c. The price of MP3 players increased because the costs of production increased from 2007 to 2008. c. Technology is lost Suppose that, as before, Alpine Sports has been producing only skis. c. Experiencing decreasing opportunity costs. How much she likes candy bars. b. c. Greater production of one good requires increasingly larger sacrifices of other goods. In order to produce any good or service, it is necessary to have factors of production d. The supply of building materials to Florida will increase. 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 a. 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. smaller amounts (it is increasing at a decreasing rate). 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. Created by Sal Khan. b. d. All of the choices. Suppose a hurricane hits Florida causing widespread damage to houses and businesses. Supply curves are flat. Price will increase until it reaches the equilibrium price. The major traceable reason for this is inefficiency in resource reallocation. Which of the following statements about markets is not true? The Great Depression was a costly experience indeed. 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. perfume? Which one will it choose to shift? A leftward shift of the market demand curve for HDTVs, ceteris paribus, causes equilibrium price to: A decrease in the demand for pens. Which of the following is a determinant of supply? Because the production possibilities curve for Plant 1 is linear, we can compute the slope between any two points on the curve and get the same result. one airline if the other one goes out of business? An increase in population 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. The slopes of the production possibilities curves for each plant differ. Had the firm based its production choices on comparative advantage, it would have switched Plant 3 to snowboards and then Plant 2, so it would have operated at point 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. When a surplus exists for a product: The same slope throughout the line. That would bring ski production to 300 pairs, at point B. c. The quantity increases but the change in the price cannot be determined Such specialization is typical in an economic system. Put calculators on the vertical axis and radios on the horizontal axis. It can shift to ski production at a relatively low cost at first. 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. Two things could leave an economy operating at a point inside its production possibilities curve. In other words, the production of wheat is declining by greater and greater amounts: the opportunity cost is increasing. So let's compare straight and curved frontier lines to better understand what is more likely to happen when production changes. In 2007 a company sold 35,000 MP3 players at $150 each. What Is A Simple Definition Of Opportunity Cost? The law of increasing opportunity cost states that when a company continues raising production its opportunity cost increases. Suppose that Alpine Sports is producing 100 snowboards and 150 pairs of skis at point B. Points within the frontier indicate resources that are underemployed. For example, there might be a trade-off between hunting for rabbits or gathering berries. Have you been to a frontier lately? In this case we have categories of goods rather than specific goods. Second, it might not allocate resources on the basis of comparative advantage. Product market. 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. Results from a change in price of other goods. In a market economy, the people who receive the goods and services that are produced are those who: b. b. It loses the opportunity to produce 2 gadgets. In other words, the opportunity cost of producing 2 widgets is now 4 gadgets. 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. Increase and the equilibrium quantity of jelly to increase. In Plant 2, she must give up one pair of skis to gain one more snowboard. A straight line when there is constant opportunity costs b. With all three of its plants producing skis, it can produce 350 pairs of skis per month (and no snowboards). I personally like having the large number in the y-axis, so I would label that lbs of candy. Since we have assumed that the economy has a fixed quantity of available resources, the increased use of resources for security and national defense necessarily reduces the number of resources available for the production of other goods and services. We can use the production possibilities model to examine choices in the production of goods and services. 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. If the firm wishes to increase snowboard production, it will first use Plant 3, which has a comparative advantage in snowboards. b. Assume that steel is used to produce monkey wrenches. The shape of the PPF depends on whether there are increasing, decreasing, or constant costs. A change in demand means there has been a shift in the demand curve, and a change in quantity demanded: Figure 2.8 Idle Factors and Production shows an economy that can produce food and clothing. 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. Learn more about the Q&A Resources for Teachers and Students . d. Ronald Reagan. A straight line when there is constant opportunity costs, Chapter 1 PPF (Production Possibility Frontie, ANSC 201 Chip. Would you be able to consume what you consume now? 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. 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. d. Labor market. Instead, it lays out the possibilities facing the economy. However, a straight line doesn't best reflect how the real economy uses resources to produce goods. The curve shown combines the production possibilities curves for each plant. b. A lower quantity demanded of a good reflects, ceteris paribus: d. Why she likes candy bars. The firm then starts producing snowboards. At this point, if Econ Isle produces 6 gadgets, it can produce only 4 widgets, so it loses the opportunity to produce 4 gadgets. If it fails to do that, it will operate inside the curve. Increasing the. In other words, the more gadgets Econ Isle decides to produce, the greater its opportunity cost in terms of widgets. Add the quantities demanded for each individual demand schedule vertically. A straight line indicating that the law of increasing opportunity costs applies Increasing the production of a particular good will cause the price of the good to remain constant. The production possibilities model suggests that specialization will occur. If Econ Isle transitions from widget production to gadget production, it must give up an increasing number of widgets to produce the same number of gadgets. How many calculators will it be able to produce? We have already seen that an additional snowboard requires giving up two pairs of skis in Plant 1. 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. What can Americans do to influence the economic goals of the nation? Of course, an economy cannot really produce security; it can only attempt to provide it. 1. b. ~produces ~trade-offs 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. b. Here's widget production increased by 2. d. An increase in knowledge. c. An increase in income 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. Producing a combination of goods and services beyond the production-possibilities curve. 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. 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. Notice that this curve is linear. d. A shift in the function. To see this relationship more clearly, examine Figure 2.3 The Slope of a Production Possibilities Curve. If you have difficulty accessing this content due to a disability, please contact us at 314-444-4662 or economiceducation@stls.frb.org. Workers, for example, specialize in particular fields in which they have a comparative advantage. Is not a very efficient means of communicating consumer demand to the producers of goods and services. Its downward slope reflects scarcity. Economists conclude that it is better to be on the production possibilities curve than inside it. b. Hence, the law of increasing opportunity cost. d. The market supply curve intersects the x-axis. b. a. Desired output. If there are idle or inefficiently allocated factors of production, the economy will operate inside the production possibilities curve. Its downwards slope reflects scarcity. 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. Question: According to the law of increasing opportunity costs: A. In that case, it produces no snowboards. b. The bowed-out production possibilities curve for Alpine Sports illustrates the law of increasing opportunity cost. In the wake of the 9/11 attacks in 2001, nations throughout the world increased their spending for national security. 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. When devoted solely to snowboards, it produces 100 snowboards per month. The bowed-out curve of Figure 2.4 becomes smoother as we include more production facilities. 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. Inefficient incentives Greater production means factor prices rise. 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. Suppose the firm decides to produce 100 radios. 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. Production had plummeted by almost 30%. Here's widget production increased by another 2. It has not been edited for readability, and there may be slight differences between the text and the video. (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. The opportunity cost of skis at Plant 2 is 1 snowboard per pair of skis. a. It loses the opportunity to produce 6 gadgets. As a result, producing the good is associated with greater and greater -. Specifically, if it raises production of one product, the opportunity cost of making the next unit rises. The bowed-out production possibilities curve for Alpine Sports illustrates the law of increasing opportunity cost. But this time we'll consider opportunity cost that varies along the frontier. An economy cannot operate on its production possibilities curve unless it has full employment. She also modified the first plant so that it could produce both snowboards and skis. It suggests that to obtain efficiency in production, factors of production should be allocated on the basis of comparative advantage. d. No change in the supply of or demand for airline tickets because the price is not changing right now. 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. 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. B. Now to draw the PPF, create the x and y-axis, like the ones in the video. Using an equilibrium price formula. d. Works because prices serve as a means of communication between consumers and producers. First, remember that opportunity cost is the value of the next-best alternative when a decision is made; it's what is given up. a. 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. 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