02 production possibilities and opportunity cost


Published on

  • Be the first to comment

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

02 production possibilities and opportunity cost

  1. 1. Chapter 2Production Possibilitiesand Opportunity Cost • Key Concepts • Summary • Practice Quiz • Internet Exercises ©2000 South-Western College Publishing 1
  2. 2. In this chapter, you will learn to solve these economic puzzles: Why wouldso few rock an Why are you spend Why are investment and extra or movie starsthis stars hour reading so economic growth in text, rather than going to a your classes? important? movie or sleeping? 2
  3. 3. What are the three Fundamental Economic Questions? What to produce? How to produce? For whom to produce?* Return to previous slide while in slide show 3
  4. 4. What isOpportunity Cost? The best alternative sacrificed for a chosen alternative 4
  5. 5. What Opportunity Costam I experiencing now?The most money that you could be making if you were somewhere else instead of studying these slides 5
  6. 6. Can Opportunity Costbe something other than money? Yes! That most desired activity that you are presently giving up is considered an opportunity cost 6
  7. 7. What isMarginal Analysis?An examination of the effects of additions to or subtractions from a current situation 7
  8. 8. What is an example of Marginal Analysis?When your benefit of studying these slides exceeds the opportunity cost, you will spend time studying these slides 8
  9. 9. What is a ProductionPossibilities Curve?A curve that shows the maximum combinations of two outputs that an economy can produce, given its available resources and technology 9
  10. 10. What is Technology?The body of knowledge and skills applied to how goods are produced 10
  11. 11. Production Possibilities Curve A EfficientMilitary Goods Unattainable Inefficient B Consumer Goods 11
  12. 12. What three assumptions underlie the ProductionsPossibilities Curve Model? • Fixed resources • Fully employed resources • Technology unchanged 12
  13. 13. What is the conclusion of the Production Possibilities Curve? Scarcity limits an economy to points on or below its production possibilities curve 13
  14. 14. What is the Law of Increasing Opportunity Costs?The principle that the opportunity cost increases as production of one output expands 14
  15. 15. What is Economic Growth?The ability of an economy to produce greater levels of output, represented by an outward shift of its production possibilities curve 15
  16. 16. Computers Technological Advance A Pizzas 16
  17. 17. What happens when a country decides not toinvest in new technology?Everything else being equal, the country will not grow 17
  18. 18. What is Investment?The accumulation of capital, such as factories, machines, and inventories, that is used to produce goods and services 18
  19. 19. What is the Opportunity Cost of investment?The consumer goods that could have been purchased with the money spent for plants and other capital 19
  20. 20. What does an increase in investments make possible in the future? Economic growth and more goods and services 20
  21. 21. What conclusion can wemake about investments? A nation can accelerate growth by increasing production of capital goods in excess of the capital being worn out 21
  22. 22. Key Concepts 22
  23. 23. • What are the three Fundamental Economic Q• What is Opportunity Cost?• Can Opportunity Cost be something other tha• What is Marginal Analysis?• What is a Production Possibilities Curve?• What three assumptions underlie the Producti 23
  24. 24. • What is the conclusion of the Production Possi• What is the Opportunity Cost of investment?• What does an increase in investments make po• What conclusion can we make about investmen 24
  25. 25. Summary 25
  26. 26. Thee fundamental economicquestions facing any economy are What,How, and For Whom to produce goods.The What question asks exactly whichgoods are to be produced and in whatquantities. The How question requiressociety to decide the resource mix usedto produce goods. The For Whomproblem concerns the division of outputamong society’s citizens. 26
  27. 27. Opportunity cost is the bestalternative foregone for a chosenoption. This means no decisioncan be made without cost. 27
  28. 28. Opportunity Cost ChoiceScarcity 28
  29. 29. Marginal analysis examines theimpact of changes from a currentsituation and is a technique usedextensively in economics. The basicapproach is to compare the additionalbenefits of a change with the additionalcost of the change. 29
  30. 30. A production possibilities curveillustrates an economy’s capacity toproduce goods, subject to the constraintof scarcity. The production possibilitiescurve is a graph of the maximumpossible combinations of two outputsthat can be produced in a given periodof time, subject to three conditions: 30
  31. 31. (1) All resources are fullyemployed (2) The resource base is notallowed to vary during the timeperiod. (3) Technology, which is thebody of knowledge applied to theproduction of goods, remainsconstant. 31
  32. 32. Inefficient production occurs atany point inside the productionpossibilities curve. All points alongthe curve are efficient points becauseeach point represents a maximumoutput possibility. 32
  33. 33. Production Possibilities Curve A EfficientMilitary Goods Unattainable Inefficient B Consumer Goods 33
  34. 34. The law of increasing opportunitycosts states that the opportunity costincreases as the production of an outputexpands. The explanation for the law ofincreasing opportunity costs is that thesuitability of resources declines sharplyas greater amounts are transferred fromproducing one output to producinganother output. 34
  35. 35. Investment means that aneconomy is producing andaccumulating capital. Investmentconsists of factories, machines, andinventories (capital) produced in thepresent that are used to shift theproduction possibilities curveoutward in the future. 35
  36. 36. Economic growth is representedby the production possibilities curveshifting outward as the result of anincrease in resources or an advance intechnology. 36
  37. 37. Computers Technological Advance B A Pizzas 37
  38. 38. Economic growthTechnological advance 38
  39. 39. Chapter 2 Quiz ©2000 South-Western College Publishing 39
  40. 40. 1. Which of the following decisions must be made by all economies? a. How much to produce? When to produce? How much does it cost? b. What is the price? Who will produce it? Who will consume it? c. What to produce? How to produce? For whom to produce? d. none of the above.C. Regardless of the size of wealth of a nation, it must choose a system to answer these three basic questions 40
  41. 41. 2. A student who has one evening in which to prepare for two exams on the following day has the following two alternatives: Possibility Score in Economics Score in Accounting A 95 80 B 80 90 41
  42. 42. Possibility Score in Economics Score in Accounting A 95 80 B 80 90The opportunity cost of receiving 90, ratherthan 80, on the accounting exam isrepresented by how many points on theeconomic exam? a. 15 points. A. By spending more time b. 80 points. studying for accounting and therefore spending less time c. 90 points. studying for the economics d. 10 points. exam, 15 points on the economics exam are given up. 42
  43. 43. 3. Opportunity cost is the a. purchase price of a good or service. b. value of leisure time plus out-of-pocket costs. c. best option given up as a result of choosing an alternative. d. Undesirable sacrifice required to purchase a good. C. Opportunity cost is that which is given up in the best alternative, not that which is paid in money for the good bought. 43
  44. 44. Production Possibilities Curve A EfficientMilitary Goods Unattainable Inefficient B Consumer Goods 44
  45. 45. 4. On a production possibilities curve, the opportunity cost of good X in terms of good Y is represented by a. the distance to the curve from the vertical axis. b. the distance to the curve from the horizontal axis. c. the movement along the curve. d. all of the above.C. To have more units of good X a person will have to give up units of good Y as represented on the horizontal axis. 45
  46. 46. 5. A farmer is deciding whether or not to add fertilizer to his or her crops. If the farmer adds 1 pound of fertilizer per acre, the value of the resulting crops rises from $80 to $100 per acre. According to marginal analysis, the farmer should add fertilizer if it costs less than a. $12.50 per pound. b. $20 per pound. c. $80 per pound. d. $100 per pound. b. As long as the fertilizer costs less than $20 per acre, the farmer will gain more by fertilizing then he or she will lose by the expense of the fertilizer. 46
  47. 47. 6. On a production possibilities curve, the opportunity cost of good X in terms of good Y is a production possibilities curve; a change from economic inefficiency to economic efficiency is obtained by a. movement along the curve. b. movement from a point outside the curve to a point on the curve. c. movement from a point inside the curve to a point on the curve. d. a change in the slope of the curve. C. All points on the production possibilities curve represents combinations of both goods while operating at the most efficient level possible. 47
  48. 48. 7. Any point inside the production possibilities curve is a (an) a. efficient point. b. nonfeasible point. c. inefficient point. d. maximum output combination.C. While operating within the boundaries of the production possibilities curve, more of both goods can be attained if efficiency is improved. However, points beyond the curve are not possible without an increase in resources or technological advance. 48
  49. 49. 8. Using a production possibilities curve, unemployment is represented by a point located a. near the middle of the curve. b. at the top corner of the curve. c. at the bottom corner of the curve. d. outside the curve. e. inside the curve. E. Any point underneath the production possibilities curve indicates that the economy’s resources are not being used efficiently, including labor. 49
  50. 50. 9. Along a production possibilities curve, an increase in the production of one good can be accomplished only by a. decreasing the production of another good. b. increasing the production of another good. c. holding constant the production of another good. d. producing at a point on the corner of the curve. A. Along the production possibilities curve, there are no unemployed resources. Therefore, in order to produce more of one product, units of the other product must be given up. 50
  51. 51. 10. Education and training that improve the skill of the labor force are represented on the production possibilities curve by a (an) a. movement along the curve. b. inward shift of the curve. c. outward shift of the curve. d. movement toward the curve from an exterior point.C. Investment in human capital enhances people’s ability being able to more effectively use the economy’s capital and push the production possibilities curve outward where more units of both products can be attained. 51
  52. 52. 11. A nation can accelerate its economic growth by a. reducing the number of immigrants allowed into the country. b. adding to its capital stock. c. printing more money. d. imposing tariffs and quotas on imported goods.B. By increasing its stock of capital a nation can increase its productivity. 52
  53. 53. Internet ExercisesClick on the picture of the book, choose updates by chapter for the latest internet exercises 53
  54. 54. END 54