Production Possibilities Curves: Scarcity, Trade-offs and Opportunity Costs 1. Below is a production possibilities curve for tractors and suits _____ a. If BB' represents a country's current production possibilities curve
(PPC), which would be its PPC if there were a major technological break-through in the consumer goods industry and the new technology was widely adopted? (Use two letters to indicate the curve.)
of clothing.
Tractors
Suits of Clothing
YA
B
X
_____ b. If BB' represents a country's current PPC, which would be its PPC if a new government were to come into power which forbids the use of auto-mated machinery and production techniques in all industries? _____ c. If BB' represents a country's current PPC, which would be its PPC if massive new sources of oil and coal were found within the economy and if there were technological breakthroughs in both sectors of the economy?
________________ a. If the economy moves from point A to point B, it will ________________ b. produce (more/fewer) __a.__ tractors and (more/ fewer) __b.__ suits of clothing.
_____ d. If new resources were found and new technology created what point above would become more attainable?
________________ c. If the economy is producing at point X, some of the ________________ d. resources of the economy are either (fully/not fully employed) __c.__ or (efficiently/inefficiently em- ployed) __d.__.
_____ e. If a country is not fully and efficiently utilizing its resources, it would be producing at a point such as? Using the diagrams below, illustrate the impact on the economy's production possibilities of each of the following scenarios.
________________ e. If the economy moves from point X topoint B, ________________ f. (more/ fewer) __e.__ tractors and (more/fewer) __f.__ suits will be produced.
3. An atomic bomb hits the continental United States and half of the labor force is wiped out.
________________ g. If the economy is to produce at point Y,it ________________ h. must either (add resources/increase production of tractors) __g.__ or (improve technology/increase production of suits of clothing) __h.__.
4. Research in computer-aided design (CAD) results in technological improvements that increase the efficiency of existing machines and equipment of all types. ________________ i. All the combinations of products shown in
________________ j. the production possibilities curve (PPC) can be achieved only if there are full production and full employment in the economy; the best combination of products depends upon the (values/resources/ technology) __i.__ of that society and is a (scientific/ nonscientific) __j.__ matter.
5. SDI research results in a new raw material for producing weapons. Unfortunately, the material cannot be used for butter production. 6. The economy goes into a recession, resulting in an unemployment rate of 10%. 7. Political refugees from former Croatia enter the U.S. with specialized
skills related to the dairy industry. 2. Note the following production possibilities curve and use it to answer each of the questions below.
Use the diagram below to answer questions that follow.
Capital Goods
CBA
A' B' C' D' Consumer Goods
X
Y
5.
Butter Butter
GunsGuns
Butter
Guns
3. 4.
Good B
1 2 3 4 5 6 Good A
12
10
8
6
4 2
Use the diagram below to answer the questions that follow: 8. If this economy is currently producing 12 units of Good B and 0 units of Good A: a. The opportunity cost of increasing production of Good A from 0 to 1 units is the loss of _______ unit(s) of Good B. b. The opportunity cost of increasing production of Good A from 1 unit to 2 units is the loss of _______ unit(s) of Good B. c. The opportunity cost of increasing production of Good A from 2 units to 3 units is the loss of _______ unit(s) of Good B. d. This is an example of ____________________________ (constant, increasing, decreasing, zero) opportunity cost of Good A. Use the diagram below to answer questions that follow.
Guns Guns
9. If this economy is currently producing 12 units of Good B and 0 units of Good A: 7. 6. a. The opportunity cost of increasing production of Good A from 0
ButterButter to 1 units is the loss of _______ unit(s) of Good B. b. The opportunity cost of increasing production of Good A from 1 unit to 2 units is the loss of _______ unit(s) of Good B. c. The opportunity cost of increasing production of Good A from 2 units to 3 units is the loss of _______ unit(s) of Good B. d. This is an example of ____________________________ (constant, increasing, decreasing, zero) opportunity cost of Good A. 10. A production possibilities table for two commodities, wheat and automobiles, is found below. The table is constructed employing the usual assumptions. Wheat is measured in units of100,000 bushels and automobiles in units of 100,000.
Combination
Wheat Automobiles
A 0 7B 7 6C 13 5D 18 4E 22 3F 25 2G 27 1H 28 0
Fill in the table below showing the opportunity cost per unit of producing the 1st through the 7th automobile. Automobiles Cost of Production
1st ____________2nd ____________3rd ____________4thj ____________5th ____________6th ____________7th ____________
12 Good B 10
8
6
4
2
1 2 3 Good A
Market Event Would the
demand
curve or
supply
curve
shift?
Would the
curve shift
to the right
or left?
wheat A drought destroys much of the crop. Supply Left redwood lumber
Environmentalists urge consumers to boycott redwood products.
cigars A new study shows that smoking cigars results in lots of wrinkles.
butter The price of margarine goes up. paper The price of wood pulp rises. Hula hoops Brad Pitt confides to People magazine that "he gets a
big kick out of his hula hoop."
yachts The average price of stocks falls by over 20% between now and the end of the year.
gasoline Large sports-utility vehicles (like Suburbans and Expeditions) become more popular.
umbrellas Heavy rain is forecast. tofu E. Coli bacteria is found in another meat plant. gasoline Two oil supertankers collide. hamburger The price of hamburger rises. oranges There's an early frost which destroys much of the
crop.
apples A new pesticide is developed which controls tent caterpillars.
grapes The National Marines Fisheries Service bans pesticide spraying within 1,000 feet of waterways containing coho salmon.
wine The average wage of grape harvesters rises by 10%. U.S. cars The U.S. imposes a tariff on Japanese car imports. hospital beds
Scientists discover a pill that cures cancer.
cement A 7.9 earthquake hits San Francisco. Video rentals
The price of getting cable TV goes up.
windshields A new law is passed requiring gravel trucks to cover their loads with tarps.
Taxi service
Local subway workers go on strike
Bike helmets
The price of bicycles goes down
melons The cost of water goes up.
Lucerne milk
The price of Safeway milk goes down.
jellybeans The price of jellybeans goes up. Oreo cookies
The price of milk increases.
Burger King whoppers
McDonald's lowers the price of Big Macs.
Hot dogs 60 Minutes does an expose called "The Truth about Hot Dogs."
Hot dog buns
The price of flour rises
butter Mad Cow Disease wipes out a lot of dairy cows. candles An electric company official announces that a
computer bug will likely result in power outages.
Cowboy boots
Old Navy launches an ad campaign called "Everyone in cowboy boots."
For each of the following, draw and supply and demand graph (correctly labeled) for the market indicated (the first sentence in the example identifies the market). Locate a starting equilibrium point for price and quantity. Identify which curve is going to shift and why using your determinants of supply and demand. Show on your graph how the appropriate curve shifts and label the new equilibrium points. 1. In the market for wheat. A drought destroys much of the wheat crop in Kansas and Nebraska 2. In the market for Redwood Lumber. Environmentalists urge consumers to boycott redwood products. 3. In the market for cigars. A new study shows that smoking cigars results in lots of wrinkles 4. In the market for butter. The price of margarine goes up 5. In the market for paper. The price of wood pulp increases. (Wood pulp is used to make paper.) 6. In the market for Hula Hoops. Brad Pitt confides to People Magazine that “he gets a big kick out of his Hula Hoop”. 7. In the market for Yachts. The average price of stocks falls by over 20% between now and the end of the year. 8. In the market for gasoline. Large SUV’s like Suburbans and Expeditions become more popular 9. In the market for umbrellas. Heavy rain is forecast. 10. In the market for gasoline. Two super-tankers collide. 11. In the market of oranges. There is an early frost which destroys much of the crop in Florida. 12. In the market for apples. A new pesticide is developed which controls tent caterpillars. (a threat to apples) 13. In the market for wine. The average grape harvesters rises by 10%. 14. In the market for U.S. cars. The U.S. imposes a tariff on Japanese car imports. 15. In the market for hospital beds. Scientists discover a pill that cures cancer.
16. In the market for cement. A 7.9 earthquake hits San Francisco. (Severe earthquake) 17. In the market for video rentals. The price of getting cable T.V. goes up. 18. In the market for windshields. A new law is passed requiring gravel trucks to cover their loads with tarps. 19. In the market for taxi service. Local subway workers go on strike. 20. In the market for bicycles helmets. The price of bicycles goes down. 21. In the market for melons. The cost of water goes up. 22. In the market for Oreo cookies. The price of milk increases. 23. In the market for Burger King Whoopers. McDonalds lowers the price of Big Mac’s. 24. In the market for hot dogs. 60 Minutes does an expose called “The truth about hot dogs”. 25. In the market for hot dog rolls. The price of flour rise. 26. In the market for butter. Mad Cow Disease wipes out a lot of dairy cows. 27. In the market for candles. An electric company official announces that a computer bug will likely result in power outages. 28. In the market for cowboy boots. Old Navy launches an advertising campaign called “Everyone in Cowboy Boots”.
Unit 2 – Measuring the Performance of the Economy
Gross Domestic Product (GDP)
"Gross domestic product is the total market value of all
final goods and services produced within the borders of a
country in one year."
Final goods and services are newly produced goods that
have reached their final consumer; that is, they will not
be resold to anyone else.
Unit 2 – Measuring the Performance of the Economy
Final versus Intermediate Goods Final Goods and Services
Manicures Bread Cruise missile New factory Dresses Increase in automobile inventory
Intermediate Goods Window glass in new automobiles Lumber in a new house Screws used in a cruise missile Flour for making bread Cloth for making dresses
The first list provides examples of goods and services that have reached their final buyer during the year. Answer the following questions.
1. Who buys haircuts, bread, and dresses?
2. Who buys cruise missiles?
3. Who buys a new factory or builds up an inventory of unsold products, such as automobiles?
Answer the following questions based on the second list
4. What does the word "intermediate" mean?
5. Why might window glass used in producing automobiles be called an "intermediate" good?
6. Explain why the other products are intermediate goods.
GDP consists of four parts - consumer goods and services, government purchases of goods and services, investment goods, and exports and imports.
C = family (household) spending on consumer goods and services
G = government purchases of goods and services
I = spending by firms and households on new capital such as factories, tools, inventory increases or decreases, and new houses
NX = exports are added to GDP and imports are subtracted.
Unit 2 – Measuring the Performance of the Economy
Determine the GDP component (C, G, or I) for each box.
Compact Discs
8,000 dollars
Family Minivan
50,000 dollars
Bread
5,000 dollars
Factory
24,000 dollars
Manicures
2,000 dollars
Concerts
1,000 dollars
Cruise Missile
10,000 dollars
New Roads
10,000 dollars
Increase in toy inventory
1,000 dollars
Butter
1,000 dollars
Books
5,000 dollars
Visits to Doctor's Office
20,000 dollars
Candy Bars
5,000 dollars
Apples
3,000 dollars
Police Protection
5,000 dollars
Calculate GDP and then calculate each component's percentage share of total GDP. C = $ I = $ G = $ GDP = $
Unit 2 – Measuring the Performance of the Economy
Determine the GDP component (C, G, or I) for each box.
Compact Discs
2,500 dollars
Bread
2,000 dollars
Manicures
3,000 dollars
Concerts
1,000 dollars
Visits to Doctor's Office
17,000 dollars
Candy Bars
10,000 dollars
Butter
2,000 dollars
New Roads
7,500 dollars
Cruise missile
5,000 dollars
Police Protection
5,000 dollars
Education
5,000 dollars
National Parks
2,500 dollars
State Courts
5,000 dollars
Construction Equipment
7,000 dollars
Increase in toy inventory
500 dollars
Calculate GDP and then calculate each component's percentage share of total GDP. C = $ I = $ G = $ GDP = $
Unit 2 – Measuring the Performance of the Economy
Listed below are all items consumed in the country of Pasadena and the total spending on each item. In
the space next to each item, classify the item as consumer goods and services (C), government purchases
of goods and services (G), or investment goods (I).
GDP ITEM MARKET
VALUE
_____ public library expansion 2,500 dollars
_____ canned fruits and vegetables 19,300 dollars
_____ frozen meats and fish 15,700 dollars
_____ dresses and suits 23,600 dollars
_____ park maintenance 8,200 dollars
_____ video rentals 5,200 dollars
_____ laundry services 4,100 dollars
_____ new fruit and vegetable warehouses
8,900 dollars
_____ new meat and fish freezing machines
3,200 dollars
_____ new roads and bridges and schools
12,100 dollars
_____ books 9,600 dollars
_____ construction equipment 2,400 dollars
_____ police and fire protection 2,500 dollars
_____ new housing 1,800 dollars
_____ furniture 1,900 dollars
Calculate GDP and then calculate each component's percentage share of total GDP. C = $ I = $ G = $ GDP = $
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