It has two plants, Plant R and Plant S, at which it can produce these goods. C. Inefficient incentives In a market economy, which of the following is an incentive for producers to produce efficiently? a. The bowed-out shape of the production possibilities curve illustrates the law of increasing opportunity cost. This phenomenon is illustrated graphically with a bow-shaped curve. Increasing the availability of these goods would improve the standard of living. In Plant 2, she must give up one pair of skis to gain one more snowboard. The opportunity cost of an additional snowboard at each plant equals the absolute values of these slopes. The goal of the consumer in a market economy is to use his/her limited income to buy: If the government places a binding price ceiling on cancer-treating drugs, then: c. The market mechanism has failed to achieve social efficiency. At this point, Econ Isle can produce 10 gadgets and 2 widgets. a. Thus, the production possibilities curve not only shows what can be produced; it provides insight into how goods and services should be produced. Both the price and quantity increase View the full answer. 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 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. C d. Increasing opportunity costs will occur with greater tank production. 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. Among the compensation packages, 70% comprise of the employee wages. The supply curve for monkey wrenches will shift to the right. The production possibilities curves for the two plants are shown, along with the combined curve for both plants. Answer: The statement is: True. We will generally draw production possibilities curves for the economy as smooth, bowed-out curves, like the one in Panel (b). A mixed economy: First, remember that opportunity cost is the value of the next-best alternative when a decision is made; it's what is given up. She also modified the first plant so that it could produce both snowboards and skis. constraints. Sort by: Ceteris paribus, if the subsidies given to corn syrup producer decrease, then we can expect: ~produces ~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 Actual output. a. The supply of MP3 players increased from 2007 to 2008. An economy that is operating inside its production possibilities curve could, by moving onto it, produce more of all the goods and services that people value, such as food, housing, education, medical care, and music. b. The law of supply implies that: c. Decreases as its price falls, ceteris paribus. To shift from B to B, Alpine Sports must give up two more pairs of skis per snowboard. 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. Florida places a price ceiling on all building materials to keep the prices reasonable. To construct a combined production possibilities curve for all three plants, we can begin by asking how many pairs of skis Alpine Sports could produce if it were producing only skis. The Great Depression was a costly experience indeed. Which of the following is not a macroeconomic statement? This is a difficult concept made simple using the PPF. Expectations b. These are also illustrated with a production possibilities curve. Producing a snowboard in Plant 3 requires giving up just half a pair of skis. d. From 2007 to 2008 the demand curve for MP3 players was upward sloping because of improved technology. Means a shortage or surplus will result from holding prices constant. An increase in the demand for airline tickets. B. 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. 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. 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. The largest IT transaction of the quarter was EMC's $625\$ 625$625 million acquisition of VMWare. The market supply curve intersects the y-axis. d. Find the difference between the quantity demanded and the quantity supplied at each price. Have the most political power. 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. 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. Figure 2.4 Production Possibilities at Three Plants. In other words, opportunity cost subtracts the cost of the chosen outcome from the cost of the outcome that a company could have chosen. The greater the absolute value of the slope of the production possibilities curve, the greater the opportunity cost will be. Points on the interior of the PPC are inefficient, points on the PPC are efficient, and points beyond the PPC are unattainable. These values are plotted in a production possibilities curve for Plant 1. In material terms, the forgone output represented a greater cost than the United States would ultimately spend in World War II. Understand specialization and its relationship to the production possibilities model and comparative advantage. 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. A decrease in the supply of airline tickets. 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 opportunity cost of choosing this option is then 12% rather than the expected 2%. The more one is willing to pay for resources, the smaller will be the possible level of production. Suppose a manufacturing firm is equipped to produce radios or calculators. In this example, production moves to point B, where the economy produces less food (FB) and less clothing (CB) than at point A. To calculate market demand we: 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. The decision to devote more resources to security and less to other goods and services represents the choice we discussed in the chapter introduction. The opportunity cost of moving from . 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. The steeper the curve, the greater the opportunity cost of an additional snowboard. d. Fewer units actually purchased. c. Want the goods and services the most. c. Decreasing opportunity costs will occur with greater automobile production. The sensible thing for it to do is to choose the plant in which snowboards have the lowest opportunity costPlant 3. A decrease in the size of the labor force 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. a. Consumers increase demand. c. Experiencing decreasing opportunity costs. Between points A and B, for example, the slope equals 2 pairs of skis/snowboard (equals 100 pairs of skis/50 snowboards). B. Production had plummeted by almost 30%. For this scenario to take the factors of production -land, labor, and capital- must be at their maximum efficiency. When factors of production are allocated on a basis other than comparative advantage, the result is inefficient production. 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. 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 vertically. b. Price will increase until it reaches the equilibrium price. b. Workers, for example, specialize in particular fields in which they have a comparative advantage. In our example, all three plants are equally good at snowboard production. To see this relationship more clearly, examine Figure 2.3 The Slope of a Production Possibilities Curve. 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). According to the law of demand, during a given period of time, the quantity of a good demanded: A. When economists talk about "optimal outcomes" in the marketplace, they mean that: 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. a. Economists conclude that it is better to be on the production possibilities curve than inside it. b. d. Lack of money. 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. Could an economy that is using all its factors of production still produce less than it could? B. 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. Figure 2.3 The Slope of a Production Possibilities Curve. Hong Kong, with its huge population and tiny endowment of land, allocates virtually none of its land to agricultural use; that option would be too costly. To provide students with online questions following each video, register your class through the Econ Lowdown Teacher Portal. c. There will be a movement to the right along the initial demand curve Its resources were fully employed; it was operating quite close to its production possibilities curve. a. Let's increase widget production in increments of 2 again until only widgets and no gadgets are produced. Finally, increasing by another 2, Econ Isle can produce 0 gadgets and 6 widgets. Have you been to a frontier lately? 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 a. We begin at point A, with all three plants producing only skis. The bowed-out production possibilities curve for Alpine Sports illustrates the law of increasing opportunity cost. Greater production leads to greater inefficiency. This production possibilities curve shows an economy that produces only skis and snowboards. This production possibilities curve includes 10 linear segments and is almost a smooth curve. 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. It illustrates the production possibilities model. c. Decrease and the equilibrium quantity of jelly to decrease. c. Decrease and the equilibrium quantity of ice cream to increase. Alpine thus gives up fewer skis when it produces snowboards in Plant 3. This curved line illustrates our fifth and final lesson. c. The price of MP3 players increased because the costs of production increased from 2007 to 2008. Change in y coordinates between two points divided by the change in their x coordinates. perfume? We assume that the factors of production and technology available to each of the plants operated by Alpine Sports are unchanged. Assume milk is used to produce ice cream. Decrease and quantity to decrease. An economys factors of production are scarce; they cannot produce an unlimited quantity of goods and services. What Is A Simple Definition Of Opportunity Cost? 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). b. d. The supply of cancer-treating curves will increase. Below is the full transcript of this video presentation. 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Plants, each with a linear production Plant R and Plant S, at which can! The following is an incentive for producers to produce efficiently which they have a comparative advantage additional snowboard b. the... Students with online questions following each video, register your class through the Econ Lowdown Teacher.! Quantity increase View the full answer shortage or surplus will result from holding constant... -Land, labor, and points beyond the PPC are unattainable it is better to be the... War II phenomenon is illustrated graphically with a linear production, register your class through the Econ Lowdown Portal! A pair of skis to gain one more snowboard concept made simple using the.! The production of different goods, b. B of time, the quantity of jelly to.! The prices reasonable plants are equally good at snowboard production are also with.
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