1

Scarcity, Opportunity Cost, and Production

Possibilities Curves

The primary economic problem facing all individuals, families, businesses, and nations is the scarcity
of resources: There simply are not enough resources to satisfu the unlimited wants for goods and
services. Scarcity necessitates choice. Consuming or producing more of one thing means consuming
or producing less of something else. The opportunity cost of using scarce resources for one thing
instead of something else is often represented in graphical form as a production possibilities curve
(PPC). A nation's PPC shows how many units of two goods or services the nation can produce in one
year if it uses its resources fully and efficiently. This activity uses the PPC to illustrate how scarcity
requires choices and the opportunity cost of those choices.

PartA: Basic Production Possibilities Curves

Figure 1-2. 1 shows a basic PPC for the production of Goods A and B. Use Figure 1-2. 1 to answer the
questions that follow.

mm Figure 1-2.1
A Linear Production Possibilities Curve

12

10
I
I
I

I ----r I

I I
I I
d) I I

o 6
I
----r ----r I
I

o
o I
I
I
I
o
I

I I I

I
----r I
I

4 f
I I I
I I I
I t I
I
----r I I
2
I t
I I
I I
I I

012 3456
GOOD A

Advanced Placement Economics Microeconomics: Student Resource Manual @ Council for Economic Education, New York, N.Y, 7
ffi
1 . Assume the economy represented by Figure I -2. 1 is presently producing 12 units of Good B and
0 units of Good A:

(A) The opportunity cost of increasing production of Good A from 0 units to 1 unit is the
loss of 2 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 2 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 - 2 unit(s) of Good B.
(D) This is an example of (constant / increasing / decreasing / zero) opportunity cost per unit for
e

-
GoodA.

8 Advanced Placement Economics Microeconomics: Student Resource Manual O Council for Economic Education, NewYork, N.Y
g
H1
Figure l-2.2 contains a typical PPC often used by economists. This PPC is concave to the origin; it gets
steeper as the country moves out along its horizontal axis. Use Figure l-2.2 to answer the questions
below it.

ffim Frglure l-2.2

A Concave Production Possibilities Curve

12

10

8
c0
o
o
o
(,
6 f

0 1 2 3
GOOD A

2. If the economy represented in Figure l-2.2 is presently producing 12 units of Good B and 0 units
ofGoodA:
(A) The opportunity cost of increasing production of Good A from 0 units to 1 unit is the loss of
2 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
4 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
S unit(s) of Good B.
(D) This is an example of (constant / increasing / decreasing / zero) opportunity cost per unit for
-

Good A.

Advanced Placement Economics Microeconomics: Student Resource Manual @ Council for Economic Education, New York, N.Y 9
 I ACTIVITY 1

Part B: Understanding the Shape of a Concave PPC

The "law of increasing opportunity cost" explains why the typical PPC is concave to the origin (bowed
outward). Figure 1-2.3 shows the PPC for the country of Costica. The country currently operates at
point A and produces 75 million units of civilian goods and 2 million units of military goods. If the
country decides to increase its military provision to 3 million units, it must give up only 5 million
units in civilian goods because certain factories are easily converted from civilian production to
military production. However, if Costica decides it must continue to increase its military production,
the opportunity cost of doing so increases because now it is more difficult to convert other factories
to military production. Resources are not equally well suited to the production of all goods. The
opportunity cost of increasing military output from 6 million units to 7 million units (point C to
point D) has increased to t5 million units in civilian goods. This increasing opportunity cost is
reflected in the steeper slope of the PPC as the country produces more military goods and fewer
civilian goods.

ffi Figure 1-2.3

Showing the Law of Increasing Opportunity Cost

90

A
-5 B
9zo
c +1
f

Euo
c
.o

Euo
a
o c
o40
o
(,
-'15
e30 D
-J
+1
3ro
10
\
\
01 2345678 I 10 11
MILITARY GOODS (millions of units)

l0 Advanced Placement Economics Microeconomics; Student Resource Manual O Council for Economic Education, New York, N.Y
f Part C: DrawingVarious PPCs
Use the following axes to draw the type of curve that illustrates the label above each graph

nfi Figure 1-2.4 ffi Figure 1-2.5

Production Possibilities Curve l: Production Possibilities Curve 2:
Increasing Opportunity Cost per Unit Zero Opportunity Cost per Unit of
ofGood B Good B

5 =
-

I
5-
&

④
-
*

- -

4 -

3 (D 00
o o
o 3
o-

o
(, o
(,
2 2 -

I
-

i A

iii
S

GOOD A GOOD A
10 48 50
To 30
ffiffi Figure 1-2.6
Production Possibilities Curve 3:
Constant Opportunity Cost per Unit
ofGood B

↳) =

-o

!
I
-
a

c0
o
o
L (, ⑧

T -

GOOD A
2

Advanced Placement Economics Microeconomics: Student Resource Manual @ Council for Economic Education, New York, N.Y 11
 Part D: Economic Growth
Over time, most countries see an increase in their ability to produce goods and services. This
"economic growth" is shown as an outward shift of the PPC and results from a variety of factors,
including improved technology, better education, and the discovery of new resources. Use Figure 1-2.7
to answer the next five questions. Each question starts with Curve BE as a country's PPC.->

ffim Figtre l-2.7

Production Possibilities Curve: Capital Goods and Consumer Goods

c
rX

@B
o
o
9n
-J
F
0-

rY

DEF G
CONSUMER GOODS

3. Suppose there is a major technological breakthrough in the consumer-goods industry, and

the new technology is widely adopted. Which curve in the diagram would represent the new
PPC? (Indicate the curve you choose with two letters.) BF
4. Suppose a new government comes into power and forbids the use of automated machinery and
modern production techniques in all industries. Which curve in the diagram would represent the
new PPC? (Indicate the curve you choose with two letters.) AD
5. Suppose massive new sources of oil and coal are found within the economy and there are major
technological innovations in both industries. Which curve in the diagram would represent the
new PPC? (Indicate the curve you choose with two letters.) CG

6. If BE represents a country's current PPC, what can you say about a point like X? (Write a brief
statement.)

points like X are unattainable in terms of production ·

capacity

7. If BE represents a country's current PPC, what can you say about a point like Y? (Write a brief
statement.)

like Y attainable but inefficient in terms of production capacity

points are
(
Cinefficient production
t2 Advanced Placement Economics Microeconomics: Student Resource Manual @ Council for Economic Education, New York, N.Y.
u
Use Figure 1-2.8 to answer the next three questions.

ffi Figure 1-2.8

Production Possibilities Curve: Economic Growth

M W

AH
o
o
o
o V
J
f
(L
o

J N
CONSUMER GOODS

8. What change could cause the PPC to shift from the original curve (HJ) to the new curve (MN)?

-More advanced technology is utilized in factories

-improved labor's quality or

capital

9. Under what conditions might an economy be operating atPointZ?

-lack of capital

-
Capital ,
resources
, techonology are not efficiently employed

10. Why might a government implement a policy to moye the economy from Point V to Point W?

They move from producing consumer goods to

capital goods
to handle demand .

Advanced Placement Economics Microeconomics: Student Resource Manual @ Council for Economic Education, New York, N.Y 13
 D etermining C o mp arativ e Adv antage

Voluntary trade between two individuals or two countries occurs if both parties feel that they will
benefit. Producers have an incentive to make products for which they have a lower opportunity cost
than other producers. When both producers specialize according to their comparative advantage,they
increase the total amount of goods and services that are available for consumption. To determine who
has a comparative advantage in producing a particular item, we need to calculate each producer's
opportunity costs of creating the items. The way we calculate opportunity cost depends on how the
productivity data are expressed.
There are two ways to measure productivity: the "input method" and the "output method." We can
calculate the quantity of output produced from a given amount of inputs, or we can measure the amount
of inputs necessary to create one unit of output. Examples of output are tons of wheat per acre, miles
per gallon, words per minute, apples per tree, and televisions produced per hour. Examples of input are
number of hours to do a job, number of gallons of paint to paint a house, and number of acres to feed a
horse. We will work through an example that expresses productivity from the perspectives of an input
measure and an output measure.

Part A: Two Approaches to Comparative Advantage

(p Student Alert:Inusing these models to determine the lower opportunity costs from both an input
and output viewpoint, you must pay attention to the format of the chart. [t makes a difference!

Input Method
The "input method" provides data on the amount of resources needed to produce one unit of output.
Thble l-3.1 gives productivity information for Ted and Nancy.

ffi *0,. ,-r.t

Productivity Data Using the Input Method

Time required to produce Time required to produce

one radio one bushel of wheat

Ted 20 minutes 5 minutes

Nancy 30 minutes 15 minutes

Ted has an absolute advantage in theproduction of both radios and wheat because he uses fewer
resources (time) to produce each item than does Nancy. Even though this might suggest that Ted
cannot benefit from trade with Nancy, our examination of the opportunity costs of production will
show that is not the case.

Advanced Placement Economics Microeconomics: Student Resource Manual @ Council for Economic Education, New York, N.Y, 15
 1

Table 1-3.2 shows the opportunity costs for each producer. To find the opportunity cost of producing
one radio, the amount of resources it takes to produce a radio goes above the amount of resources that it
takes to produce a bushel ofwheat.

ffi Table l-3.2

Opportunity Cost of Producing Radios and Wheat
Opportunity cost of producing Opportunity cost of producing one
one radio bushel of wheat

20 minutes 5 minutes
Ted lradio=---
5 mtnules
=4bushels l wheat = ^- mtnules
zu
=liradio
30 minutes 15 minutes
Nancy 1 radio = = 2 bushels 1 wheat = =Yz radio
15 minutes 30 minutes

In the 20 minutes it takes Ted to produce one radio, he instead could have produced four bushels of wheat.
Instead of producing one radio in 30 minutes, Nancy could have produced two bushels of wheat. The fact that
Nanry has the lower opportunity cost of producing radios means she has the comparative advantage in radios.

In the five minutes he needs to produce one bushel of wheat, Ted could have made Va of a radio. Nancy's
opportunity cost of producing one bushel of wheat is lz of a radio. Because his sacrifice in producing one
bushel of wheat is less than Nancy's, Ted has the comparative advantage in wheat production.

If Ted specializes in wheat production while Nancy specializes in radio production, their combined
output of radios and wheat will be larger than it would be if each person produced both products.

Output Method
The "output method" gives data on the amount of output that can be produced with a given amount of
an input. Now let's take this same set of productivity data and turn it into an output format. To do this, we
ask how many units of an item the producers can create with a given amount of resources. Let's suppose
that both producers have one hour to produce each product. Thble 1-3.3 shows how many radios and how
manybushels of wheat each producer can make in one hour. From this output viewpoint, you once again
see that Ted has the absolute advantage in the production of both products. With the same amount of
resources (one hour of labor), he can produce more radios and more wheat than Nancy.

t Table 1-3.3
Productivity Data Using the Output Method
Radios produced per hour Wheat produced per hour

Ted
60 minutes
=3 IzCllOS
-- minutes
60
, --- =12bushels
20 minutes 5 minutes

60 minutes 60 minutes
Nancy = 2 I2dlOS = 4 bushels
30 minutes 15 minutes

16 Advanced Placement Economics Microeconomics: Student Resource Manual o Council for Economic Education, NewYork, N.Y
 But what about the opportunity cost to produce each item? Check out Thble l-3.4, which shows how to
calculate each producer's opportunity cost of the two items. To find Ted's opportunity cost of producing
one radio, the number of radios he can produce in one hour goes under the number of bushels of wheat he
can produce in that same time frame.

ffi Table 1-3.4

Opportunity Cost of Producing Radios and Wheat
Opportunity cost of producing Opportunity cost of producing one
one radio bushel of wheat

3 radios = t hour = 12 bushels 12 bushels = t hour = 3 radios

Ted
1/a radio
1 radio = 1213 = 4 bushels 1 bushel = 3112 =

2 radios = t hour= 4 bushels 4 bushels = t hour= 2 radios

Nancy
l radio=412=2bushels 1 bushel = 214 = lz radio

Because Ted's cost per radio is four bushels of wheat, whereas Nancy's cost is only two bushels, we know
Nanry has the comparative advantage in producing radios. Ted has the comparative advantage in wheat
production since he has the lower opportunity cost of producing a bushel of wheat (1/e radio compared to
Nancy's Yz radio). Does this sound familiar? This is the same result we reached using the input method.

The differences in opportunity costs define the limits of a trade in which both parties will benefit. If
Nanry specializes in radio production, she will accept no less than two bushels of wheat for one radio.
Ted will pay no more than four bushels of wheat per radio. Thus, the "terms of trade" acceptable to both
producers must lie in the range befiveen two bushels for one radio and four bushels for one radio. For
example, suppose they agree to trade one radio for three bushels of wheat. By producing and trading one
radio to Ted, Nancy will have a net gain of one bushel. Her opportunity cost of producing the radio is two
bushels and she receives three bushels in return for the radio. Because his opportunity cost of producing
one bushel is 7e radio, Ted's opportunity cost of producing the three bushels, which he trades to Nancy, is
3/+ radio. Thus, the trade gives Ted a net gain of Y+ radio. Both producers gain by specializing according to
their comparative advantage.

When it comes to producing wheat, Ted would have to receive at least r/q of a radio in trade for a
bushel of wheat. Nancy would require at least Vz of a radio before she would trade a bushel of wheat. The
acceptable terms of trade would be found between Vs radio and Yz radio per bushel of wheat.

The output data in Table 1-3.3 can be used to create production possibility frontiers for Ted and Nancy
to show the combinations of radios and wheat each can produce in one hour of work. See Figure l-3.1.

Advanced Placement Economics Microeconomics: Student Resource Manual @ Council for Economic Education, New York, N.Y. t7
K
ffi Figure 1-3.1
Production Possibilities Curves for Ted and Nanry

Ted Nancy
3
a a
a
o 2
Io 2
cr tr
'1
1

0
4 812 24
WHEAT WHEAT

Part B: Comparative Advantage Exercises

For each of the following scenarios, answer the questions following the chart. The first problem is
answered for you.

1. Anna and Barry can grow the following amounts of potatoes and cabbage with a week of labor.
-

Potatoes per week Cabbage per week 5/8

-
Anna 2 100 units 200 units
-

Barry 5/2 120 units 150 units 8/5

(A) Is this an example of an input problem or an output problem?

output

(B) What is the opportunity cost for each producer in making these products?

( 1) Anna's opportunity cost of producing a unit of potatoes is 2 units of cabbage.

(2) Barry's opportunity cost of producing a unit of potatoes is 5/4 units of cabbage.

18 Advanced Placement Economics Microeconomics: Student Resource Manual o Council for Economic Education, New York, N.Y
 (3) Anna's opportunity cost of producing a unit of cabbage is
↑
12 units of potatoes.

-
(4) Barry's opportunity cost of producing a unit of cabbage is 4/5 units of potatoes.

-
(C) Who has the comparative advantage in producing potatoes?

(D) Who has the comparative advantage in producing cabbage? Barre a

Note; In this example, each producer has the absolute advantage in producing one item: Barry in
potatoes and Anna in cabbage. That might not be the case in the other examples.

2. Henry and Iohn are fishermen who catch bass and catfish. This chart shows how many of each
type of fish they can catch in one day.

Bass Catfish

Henry 4 bass 6 catfish

John 24 bass 12 catfish

(A) Is this an example of an input problem or an output problem?

(B) What is the opportunity cost for each person in catching these fish?

( 1) Henry's opportunity cost of catching 1 bass is 43 catfish.

242
(2) Iohn's opportunity cost of catching 1 bass is catfish.

(3) Henry's opportunity cost of catching 1 catfish -is bass.

(4) Iohn's opportunity cost of catching I catfish -is 112 bass.

-
(C) Who has the comparative advantage in catching

(D) Who has the comparative advantage in catching catfish?

-
bass?
jea

Advanced Placement Economics Microeconomics: Student Resource Manual @ Council for Economic Education, New York, N.Y. t9
I
I
3. This chart shows how many days it takes the ABC Corporation and the XYZ Corporation to
produce one unit of cars and one unit of planes.

Cars Planes

ABC Corp. 8 days 1 0 days

XYZ Corp. 1 5 days 12 days

(A) Is this an example of an input problem or an output problem?

Input
(B) What is the opportunity cost for each corporation in producing these goods?

4/5
·

( 1) ABC's opportunity cost of producing a unit of cars is units of planes.

(2) KYZ's opportunity cost of producing a unit of cars is 514 units of planes.

(3) ABC's opportunity cost of producing a unit of planes -is 5/4 units of cars.
(4) XYZ's opportunity cost of producing a unit of planes -is units of cars.
-
(C) Who has the comparative advantage in producing cars? ABC
-

(D)Who has the comparative advantage in producing planes? xYz

4. Here are the numbers of acres needed in India and China produce 100 bushels of corn or 100
bushels of rice each month.

lndia China

Corn 9 acres I acres

Rice 3 acres 2 acres

(A) Is this an example of an input problem or an output problem?

Output

20 Advanced Placement Economics Microeconomics: Student Resource Manual o Council for Economic Education, NewYork, N.Y
 (B) What is the opportunity cost for each country in producing these goods?
( 1) India's opportunity cost of growing 100 bushels of corn is 300 bushels of rice.

(2) China's opportunity cost of growing 100 bushels of corn is 400 bushels of rice.

(3) India's opportunity - 33

cost of growing 100 bushels of rice is bushels of corn.

(4) China's opportunity cost of growing 100 bushels of rice is - 25 bushels of corn.
-
(C) Who has the comparative advantage in growing corn? India
-

(D) Who has the comparative advantage in growing rice? China

5. This chart shows how many cans of olives and bottles of olive oil can be produced in Zaire and
Colombia from one ton of olives.

Zaire Colombia

Olives 60 cans 24 cans

Olive oil 10 bottles 8 bottles

(A) Is this an example of an input problem or an output problem?

Input
(B) What is the opportunity cost for each country in producing these goods?

1163
( 1) Zaire's opportunity cost of producing I can of olives is bottles of olive oil.

(2) Colombia's opportunity cost of producing I can of olives is bottles of olive oil.

(3) Zaire's opportunity cost of producing 1 bottle of olive oil - is cans of olives.

(4) Colombia's opportunity cost of producing - is

1 bottle of olive oil 3 cans of olives.

(C) Who has the comparative advantage in producing olives? Zaire

-

(D) Who has the comparative advantage in producing olive oil? Columbia

Advanced Placement Economics Microeconomics; Student Resource Manual @ Council for Economic Education, New York, N.Y 2t
 6. Here are the numbers of hours needed in Redland and Blueland to produce a unit of televisions
and a unit of computers.

Televisions Computers

Redland 115 '18 hours

3 6 hours
Blueland 14 16 hours 2 4 hours

(A) Is this an example of an input problem or an output problem?

Input
(B) What is the opportunity cost for each country in producing these goods?
(1) Redland's opportunity cost of producing 1 unit of televisions is 113 units of computers.

(2) Blueland's opportunitF cost of producing 1 unit of televisions is 114 units of

computers.

(3

(4)
) Redland's opportunitF cost of producing 1 unit of computers is

Blueland's opportunity cost of producing 1 unit of computers is

↳
- units of televisions.

units of televisions.
-
Blueland
(C) Who has the comparative advantage in producing televisions?
-

(D)Who has the comparative advantage in producing computers? Redland

22 Advanced Placement Economics Microeconomics: Student Resource Manual O Council for Economic Education, New York, N.Y