The bowed-out production possibilities curve for Alpine Sports illustrates the law of increasing opportunity cost. The law of increasing opportunity cost helps managers assess the trade-off of a decision to move resources away from one area of production to another. Economic Lowdown Video Series, economic education specialist Scott Wolla explains how the production possibilities frontier (PPF) illustrates some very important economic concepts. Results from a change in price of other goods. Suppose Alpine Sports expands to 10 plants, each with a linear production possibilities curve. 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. Actual output. 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. b. 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). 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. Think about what life would be like without specialization. c. Government purchases decrease. Intermediate goods; final goods and services b. She added a second plant in a nearby town. 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. D. producing equal amounts of all goods, B. The second plant, while smaller than the first, was designed to produce snowboards as well as skis. b. Bureaucratic delays The law of supply implies that: 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. Answer: The statement is: True. According to the law of increasing opportunity costs, Multiple Choice Greater production leads to greater inefficiency. constraints. Now suppose the firm decides to produce 100 snowboards. Plant 3 has a comparative advantage in snowboard production because it is the plant for which the opportunity cost of additional snowboards is lowest. a. c. An increase in the supply of pens. A decrease in the price of perfume 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. Neither skis nor snowboards is an independent or a dependent variable in the production possibilities model; we can assign either one to the vertical or to the horizontal axis. In 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. In order to produce any good or service, it is necessary to have factors of production Now consider what would happen if Ms. Ryder decided to produce 1 more snowboard per month. Jessie's demand schedule for candy bars indicates: 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. Figure 2.6 Production Possibilities for the Economy. Now draw the combined curves for the two plants. c. Supply curves are downward-sloping to the right. 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. Combination A involves devoting the plant entirely to ski production; combination C means shifting all of the plants resources to snowboard production; combination B involves the production of both goods. A decrease in the demand for corn syrup. d. The supply of building materials to Florida will increase. Which of the following statements about markets is not true? b. Suppose both the demand and supply of salsa increase (although not necessarily by the same amount). Figure 2.9 Efficient Versus Inefficient Production illustrates the result. Economists often use models such as the production possibilities model with graphs that show the general shapes of curves but that do not include specific numbers. 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. 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. c. Other things remain equal. b. A. Change in y coordinates between two points divided by the change in their x coordinates. 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. Figure 2.3 The Slope of a Production Possibilities Curve. In other words, the opportunity cost of producing 2 widgets is 2 gadgets. We can use the production possibilities model to examine choices in the production of goods and services. For example, many Econ Isle workers are likely very productive gadget makers. a. If the firm wishes to increase snowboard production, it will first use Plant 3, which has a comparative advantage in snowboards. d. Jenny's wage rate rose and, in response, she decided to work more hours. d. No change in the supply of or demand for airline tickets because the price is not changing right now. At the same time, more and more wheat is lost. Notice that this production possibilities curve, which is made up of linear segments from each assembly plant, has a bowed-out shape; the absolute value of its slope increases as Alpine Sports produces more and more snowboards. The table shows the combinations of pairs of skis and snowboards that Plant 1 is capable of producing each month. The production of both goods rises. Have the most political power. a. the most likely result? C. c. The two types of markets include the factor and product markets. b. Assume milk is used to produce ice cream. output is produced. That was a loss, measured in todays dollars, of well over $3 trillion. Plant 3 would be the last plant converted to ski production. The points on a production-possibilities curve show: A decrease in the supply of corn syrup. I personally like having the large number in the y-axis, so I would label that lbs of candy. c. The price of the good itself then: 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. Alpine Sports can thus produce 350 pairs of skis per month if it devotes its resources exclusively to ski production. Instead of the bowed-out production possibilities curve ABCD, we get a bowed-in curve, ABCD. c. The production-possibilities curve 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. It need not imply that a particular plant is especially good at an activity. Specifically, if it raises production of one product, the opportunity cost of making the next unit rises. So let's compare straight and curved frontier lines to . When an economy is producing efficiently it is: Factors of production are also known as resources b. a. 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. How much she likes candy bars. 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. It had enjoyed seven years of dramatic growth and unprecedented prosperity. The combined production possibilities curve for the firms three plants is shown in Figure 2.5 The Combined Production Possibilities Curve for Alpine Sports. A consequence of the economic problem of scarcity is that: With respect to factors of production, which of the following statements is not true? The sensible thing for it to do is to choose the plant in which snowboards have the lowest opportunity costPlant 3. Workers, for example, specialize in particular fields in which they have a comparative advantage. a. 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. Figure 2.8 Idle Factors and Production shows an economy that can produce food and clothing. c. Percentage change in y coordinates between two points divided by the percentage change in their x coordinates. Such specialization is typical in an economic system. In most markets, the equilibrium price is achieved: 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. The curve is a downward-sloping straight line, indicating that there is a linear, negative relationship between the production of the two goods. A change in demand means there has been a shift in the demand curve, and a change in quantity demanded: 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. 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. producing a combination of goods and services beyond the production possibilities curve A decrease in tastes for perfume d. 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