LESSON 1 • ACTIVITY 1

Scarcity, Opportunity Cost and Production Possibilities Curves

Scarcity necessitates choice. Co nsum ing or producing mo re of o ne com modity or service means con ­

suming or prod ucing less of someth ing else. The oppo rtun ity cost of using scarce resources for o ne commo dity or serv ice instead of so methi ng else is often represented in graphical form as a production possibilitieswrve.

Part A Use Figures 1.1 and 1.2 to ans wer Questions 1 and 2. Fill in th e ans wer blanks, or und erli ne the correct

answer in parentheses.

~ Figure 1.1

Produ ction Possibilitie s Curve 1

12

10

8

en 8 6 - - - - :- - - - ~ - - - ­

I I

I

- - - -:- - - -I

I I I

o I ' (!J : : I

4 - - - -,- - - - J - - - - ~ - - - ­I I : t I I I

: t 1 :

2 - - - -,- - - - ... - - - - , - - - - - - - - ­f l . I

I I ' : I I I I I I I

o 2 3 4 5 6 GOOD A

1. If the eco nomy represented by Figure 1.1 is pre sen tly produci ng 12 un its of Good B an d zero units of Good A:

(A) The opportun ity cost of increasing production of Good A from zero un its to o ne unit is the loss of un itfs ) of Good B.

(0 ) Th e opportunity cost of inc reasing product ion of Good A fro m one un it to two units is the

loss of unitts ) of Good B.

(C) Th e opportunity cost of increasing produ ction of Go od A from two uni ts to three units is the loss of unitfs) of Good O.

(D) This is an exam ple of (constant I increasing I decreasing I zero) oppo rtunity cost per unit for

Good A.

Adapted from Ph illip Saun de rs. Introduction /()Microeconomics: Stu dent Workbook, I8th ed . (Bloom ington. lnd., 1998). Copyr ight i~ 1998 Phillip Saunders. All rights reserved .

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LESSON 1 • ACTIVITY 1 (continued)

Figur e 1.2 Production Possib ilities Curve 2

12

10 -- ­ - - - - ­ -I I I

III 8

I

I I

o8 6

: - --- -- - - -~ - -- - - - - --

(!) : I

4 I I I

I

I

2 I, t

I I I

o 1 2 3 GOOD A

2. If the economy represented in Figure 1.2 is presently producing 12 units of Good 13 and zero units of Good A:

(A) The oppo rtunity cost of increasing production of Good A from zero units to one unit is the loss of uni t(s) of Good B.

(B) The opportunity cost of increasing production of Good A from on e un it to two units is the loss o f unit ts) of Good B.

(C) Th e opportu nity cost of increasing productio n of Good A from two units to three un its is the Joss of unit(s) of Good B.

(D ) This is an example of i constant / increasing / decreasing / zero) opportunity cost per uni t for

GoodA.

Advanced Placement Econo mics Macroecon om ic : Student A<II\·;li., Nat ion al Council On Economi c Education. New York. N.Y.

LESSON 1 ACTIVITY 1 (continued)

Part B Use the axes in Figures 1.3 and 1.4 to d raw th e type o f urve that illustrate s the label above each axis .

III Figure 1.3 Productio n Possib ilities Curve 3 Increasing opportunity cost per unit of Good B

CD o o o o

GOOD A

Figure 1.4

Pro duct ion Possib ilities Curve 4

Cons ant opp or tunity cost pe r unit of Good 3

CD o o o (.!)

GOOD A

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LESSON 1 ACTIVITY 1 (conti nued) ,

Part e Use Figure 1.5 to answer the next five question. . Each question star ts w ith Curve BB' as a country's

production possibilities curve.

fi gure 1.5

Production Possibilit ies Curve: Capital Goods and Consumer Goods

C . x

B(j)

0 a a A<9 ....J;:; a, < u

.v

A' B ' 0 ' C ' CONSUMER GOOOS

3. Suppose there is a major technologica l breakthrough in the consum er-good s industry, and the

new technology is widely adop ted. Which curve in th e diagram would represent the new pro d uc ­tio n possibili ties cur ve? (Indicate the curve you choose wi th two let ters.) _

4. Suppose a new govern m en t comes into power and imposes a sign ificant tax on the use of auto ­

mated machinery and modern prod uct.ion techniques in all industries. Which curve in the d iagram

would represent the new pro duct ion po ssibilities cu rve? (Indicate the curve you choose with two letters.) _

5. Suppose massive new sources o f oil and coal are fo und with in t.he economy, and there arc majo r

technological innovations in both industries. Which curve in the diagram wo uld represen t the new pro duction possibilities curve? (Indicate the curve you choose with two lett ers.) _

6. If BB' represents a country's curren t produ ction possib ilities curve, wh at can you sayabout a poin t

like X? (Write a brief staternen t. )

7. If BB' represents a country's current production possibilit ies curve, what can you say about a point

like Y? (Write a b rief statement .)

Advanced Placement Economics !..tacroeco nomics: Studen t "cth'il il~ e Nal io nal Co unci l on Economic Education , few York. N.Y. 8