PRODUCTION POSSIBILITIES

Straight: Constant Cost

-Constant opportunity cost. -Straight line production possibilities curve. -Represents some production.

Concave: Decreasing Cost

-Decreasing opportunity cost. -Concave production possibilities curve. -Contrary to real world.

The Role of Assumptions

-Establish abstract benchmarks for comparison. -Break an analysis into simpler, more easily manageable parts.

Convex: Increasing Cost

-Increasing opportunity cost. -Standard convex production possibilities curve.

Economic Efficiency in Production Possibilities

-It indicates technical efficiency. -It does not indicate economic efficiency.

Preferences in Production Possibilities

-Production possibilities says nothing about preferences. -It illustrates what is possible, not what is most satisfying.

The List of Four

-Resources are used to produce two goods. -The quantities of resources are constant. -The technology used for production is constant. -Resources are used in a technically efficient way.

Investment

Acquisition of productive capital goods that are used to expand future production capabilities.

The Third Rule of Inequality

All Resources are not equal

Assumption

An abstraction from the real world that sets the stage for analysis.

The acquisition of productive capital goods that are used to expand future production is termed:

Investment

Slope formula

Slope = rise/run

The law of increasing opportunity cost

The opportunity cost of producing a good increases as more and more of the good is produced.

Law

The opportunity cost of producing a good increases as more of a good is produced.

Production possibilities analysis is most closely associated with answering the ______ question of allocation.

What?

Production Possibilities

an analysis of the alternative combinations of two goods that can be produced with existing resources and technology.

Because the economy's production possibilities are unlimited they are best represented by:

an infinite number of points forming a smooth curve.

Full employment

condition that exists when all available resources are engaged in the production of goods and services.

Unemployment

condition that exists when some available resources are NOT engaged in the production of goods and services.

Economic growth

process of increasing the economy's ability to produce goods and expand the production possibilities curve.

In terms of production possibilities analysis, the opportunity cost of the good measured on the horizontal axis is the:

slope of the production possibilities curve.

The law of increasing opportunity costs results because:

the economy's resources are not equally suitable for producing different types of goods.

The law of increasing opportunity costs is most closely associated with:

the third rule of inequality.