Spring 2015 MICRO – Coverage and Study Guide - Chapters 2
95% of the Exam questions will come from the following areas:
Chapter 2 – Production Possibilities, Opportunity Cost, and Economic Growth
It is important to keep in mind that the graphs in this chapter are not the same as the graphs in Chapter 1
and the Appendix to Chapter 1. See the explanation of Opportunity Cost below; this is an important
concept in economics. Exhibit 2 on page 39 is important in understanding this chapter. Production
Possibilities (shown on the Production Possibilities Curve) is what we are able to do with the resources
(Land, Labor, and Capital) that we have. It show what is the maximum that can be produced if we use all
of our resources.
The Three Fundamental Economic Questions that every society must answer
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

What to Produce
How to Produce It
For Whom to Produce
Exhibit 1 – page 36
Opportunity Cost (know how to define this and give examples)
Opportunity cost is not money, it is the thing you give up
when you choose something. As an example, if you choose to
be in class for an hour and 15 minutes your opportunity cost
is what you would have been doing if you had not chosen to
take a class. For some people this would be giving up watching
TV, for others it would be spending time with their children. The opportunity cost may be different from
person to person.
Marginal Analysis – know the definition
In business we always make decisions using Marginal Analysis
Production Possibilities Curve
Exhibit 2 – page 39
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Law of Increasing Opportunity Costs
This concept is a little more difficult to understand. If you look at the exhibit above, you can see that to
switch your resources to produce more of one product the opportunity costs is the amount of production of
the other good that you will have to give up. So we always incur an opportunity cost but in this case as we
continue to shift recourses over the opportunity cost increases. The reason for the increase in opportunity
cost is that the resources do not transfer very easily. In the above case for example, you may transfer a
worker who has been making tanks (military goods) for 20 years over to now making cell phones (consumer
goods). You will gain some production of cell phones and lose some production of tanks. As we continue to
switch more people to building cell phones the amount of tank production losses will increase because the
people were so skilled at building tanks that we lose a larger and larger amount of tank production as we
pull these people away from doing something they were very skilled at to something they know little about
(law of increasing opportunity costs).
Sources of Economic Growth
Exhibit 4 – page 43
Changes in Resources
Technological Change
Present Investment and the Future Production Possibilities Curve
Exhibit 5 – page 46
I consider this to be a very important exhibit. This really
explains the economic concept of investment and how
countries, businesses and individuals can delay gratification,
invest for the future, and grow their Production Possibilities curve.
Investment
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