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 = $