Opportunity Cost and Production Possibilities
Production possibilities curve: a curve
showing the different combinations of
goods and services that can be produced
in a fully employed economy, assuming the
available supplies of resources and
technology are fixed.
Law of increasing opportunity costs: a
principle stating that as the production of a
good increases, the opportunity cost of
producing an additional unit rises.
If the economy represented by PPC1
produces 12 units of Good B and 0 units of
Good A, what is true for the following
examples?
1) The opportunity cost of increasing
production of Good A from 0 units to 1 unit
is the loss of ________ unit(s) of Good B.
2) The opportunity cost of increasing
production of Good A from 1 unit to 2 units
is the loss of ________ unit(s) of Good B.
3) The opportunity cost of increasing
production of Good A from 2 units to 3 units
is the loss of ________ unit(s) of Good B.
This illustrates CONSTANT opportunity cost
per unit for Good A.
If the economy represented by PPC2
produces 12 units of Good B and 0 units of
Good A, what is true for the following
examples?
1) The opportunity cost of increasing
production of Good A from 0 units to 1 unit
is the loss of ________ unit(s) of Good B.
2) The opportunity cost of increasing
production of Good A from 1 unit to 2 units
is the loss of ________ unit(s) of Good B.
3) The opportunity cost of increasing
production of Good A from 2 units to 3 units
is the loss of ________ unit(s) of Good B.
This illustrates INCREASING opportunity
cost per unit for Good A.
Analyzing Tradeoffs
In the Production Possibilities Curve above, curve BB' is a country's original production
possibilities curve. Assuming that, answer the following:
1) If there is a technological breakthrough in the consumer-goods industry and the new
technology is widely adopted, which line would represent the new production possibilities curve?
________
2) If a new governmental regime comes into power and forbids the use of automated machinery
in all industries, which line would represent the new production possibilities curve? ________
3) If new oil and coal sources were discovered within the nation's natural reserves, sparking
massive technological innovation across industries, which line would represent the production
possibilities curve? ________
4) If BB' represents the country's production possibilities curve, what is true about point X?
5) If BB' represents the country's production possibilities curve, what is true about point Y?
Analyzing More Tradeoffs
Use the Production Possibilities Curve above to answer the following:
1) What societal change could cause the production possibilities curve to shift from XX' to YY'?
2) Under what kinds of conditions might the economy be operating at point Z?
3) Why might a government implement a policy to move the economy from point B to point A?
4) Why might a government implement a policy to move the economy from point A to point B?