Chapter 1.2: Opportunity Cost

The diagram above shows the production possibilities curve for the production of peaches and apples in Fruitland. Between points X and Y on the PPC, the opportunity cost of one unit of peaches is which of the following? A. 2 units of apples B. 1 unit of apples C. 2 units of peaches D. 1 unit of peaches E. 10 units of apples

1 unit of apples

What shifts the production possibilities curve?

1. Technological advances 2. Change in trade 3. Change in the resources quantity or quality

production possibilities curve

A curve showing the different combinations of two goods or services that can be produced in a full-employment, full-production economy where the available supplies of resources and technology are fixed.

Assume an economy produces two goods, capital goods, and consumer goods. If the production of capital goods increases in the current period, which of the following will occur for the current and future production possibilities curve (PPC) for consumer goods and capital goods? A. A movement along the current PPC and a leftward shift of the future PPC B. A movement along the current PPC and a rightward shift of the future PPC C. A rightward shift of the current PPC and a leftward shift of the future PPC D. A rightward shift of the current PPC and a rightward shift of the future PPC E. A movement along the current PPC with no shift of the future PPC

A movement along the current PPC and a rightward shift of the future PPC

Trade-off

ALL alternatives that we give up when we make a choice.

How do you find opportunity cost on a graph?

Choice A/Choice B - this only works when only one good is produced over the other. Choice A - Choice B on the x axis Choice A - Choice B on the y axis The oportunity cost is the difference.

The diagram above shows the production possibilities curve for the production of peaches and apples in Fruitland. The production possibilities curve illustrates which of the following relationships? A. The production of peaches decreases as apple production decreases. B. The production of peaches increases as apple production increases. C. The opportunity cost of peach production decreases as apple production decreases. D. Fruitland cannot produce a combination of 5 units of peaches and 10 units of apples. E. Fruitland can produce only the combinations of peaches and apples illustrated by points X and Y.

Fruitland cannot produce a combination of 5 units of peaches and 10 units of apples.

You are a lawnmower. Each Saturday, you earn $20 an hour mowing 5 lawns. One Saturday, you decide to watch a show for 5 hours instead of mowing lawns. What was the opportunity cost?

Making $100 dollars Assuming you mown 5 lawns every Saturday, your total earnings would be $100 dollars every week. ($20 x 5 = $100). If you have the choice to make $100 dollars or watch shows in the same time that you could have been working, the choice you didn't choose becomes your oppurtunity cost. In this case, you chose not to make $100 dollars, so you can watch some shows. The $100 dollars was your opportunity cost.

If the dot is on the production possibilities curve then....

all resources are used

consumer good

created for direct consumption (x axis)

capital good

created for indirect consumption; used to make consumer goods (y axis)

What does a leftward shift in the production possibilities curve mean?

economic decline

What does a rightward shift in the production possibilities curve mean?

economic growth

If the dot is over the production possibilities curve curve then...

resources are overextended/unattainable

if the dot is under the production possibilities curve then...

resources aren't being used efficiently

opportunity cost

the highest valued alternative given up as a result of making a choice; the next best thing

what does the curve on the possibility curve graph represent?

the most efficient use of resources

linear production possibilities curve

the opportunity cost is constant

convex (bowed in) production possibility curve

the opportunity cost is decreasing

concave (bowed out) production possibilities curve

the opportunity cost is increasing