Part One • An Introduction to Economics and the Economy duction of capital goods. By building up its stock of capital, society will have greater future production and, therefore, greater future consumption. By moving toward A, society is choosing "more later" at the cost of "less now."

Generalization: At any oint in time, an economy achieving full em loyment and ro-ductive efficiency must sacrifice some of one good to obtain more of another good.

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

Production Possibilities Curve

The data presented in a production possibilities table can also be shown graphically. We use a simple two-dimensional graph, arbitrarily representing the output of capital goods (here, robots) on the vertical axis and the output of consumer goods (here, pizzas) on the horizontal axis, as shown in igure 2-1 (Key Graph). Following the procedure given in the appendix to Chapter 1, we can graph a production possibilities curve.

Each point on the production possibilities curve represents some maximum output of the two products. The curve is a production frontier because it shows the limit of attainable outputs. To obtain the various combinations of pizza and robots on the production possibilities curve, society must achieve both full employment and productive efficiency. Points lying inside (to the left of) the curve are also attainable, but they are inefficient and therefore are not as desirable as points on the curve. Points inside the curve imply that the economy could have more of both robots and pizzas if it achieved full employment and productive efficiency. Points lying outside (to the right of ) the production possibilities curve, like point W, would represent a greater output than the output at any point on the curve. Such points, however, are unattainable with the current supplies of resources and technology.

opportunity cost The amount of other products that must be forgone or sacrificed to produce a unit of a product.

Opportunity Costs

Opportunity Costs

Law of Increasing Opportunity Cost

Because resources are scarce relative to the virtually unlimited wants they can be used to satisfy, people must choose among alternatives. More pizzas mean fewer robots. The amount of other products that must be sacrificed to obtain one unit of a specific good is called the opportunity cost of that good. In our case, the number of robots that must be given up to get another unit of pizza is the opportunity cost, or simply the cost, of that unit of pizza.

In moving from alternative A to alternative B in Table 2-1, the cost of 1 additional unit of pizzas is 1 less unit of robots. But as we pursue the concept of cost through the additional production possibilities—B to C, C to D, and D to E—an important economic principle is revealed: The opportunity cost of each additional unit of pizza is greater than the opportunity cost of the preceding one. When we move from A to B, just 1 unit of robots is sacrificed for 1 more unit of pizza; but in going from B to C we sacrifice 2 additional units of robots for 1 more unit of pizza; then more of robots for 1 more of pizza; and finally 4 for 1. Conversely, confirm that as we move from E to A, the cost of an additional robot is 1/4,1/, V2, and 1 unit of pizza, respectively, for the four successive moves.

Note two points about these opportunity costs:

• Here opportunity costs are being measured in real terms, that is, in actual goods rather than in money terms.

• We are discussing marginal (meaning "extra") opportunity costs, rather than cumulative or total opportunity costs. For example, the marginal opportunity cost of the third unit of pizza in Table 2-1 is units of robots (= 7 - 4). But the total opportunity cost of units of pizza is 6 units of robots (= 1 unit of robots chapter two • the economic probLem: scarcity, wants, and choices

Was this article helpful?

0 0

Post a comment