Running head: ECONOMICS 1
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What models do economists use to examine economic behavior and the economy?
The supply and demand model
What is the purpose of a possibilities curve?
To show the maximum possible combinations of the two goods or services which an
economy can achieve when all the resources are fully employed (Savosnick, 2015).
Production Possibilities means?
Is a curve which depicts all the maximum output possibilities for the two goods given
sets of inputs which has resources together with other factors
Based on the graph you created, complete the following:
1. Analyze the graphed data to develop assumptions, referencing the possibility curve
2. Identify the specific assumptions that underlie the production possibilities curve
In this scenario, the particular assumptions which underlie the production
possibilities curve concern the higher production of butter together with the lower output
of guns.
Determine the cost of more butter, if the economy is at point C
What would be the cost of producing more guns?
Since the ratio of butter to guns is one to two, the cost of producing extra guns would be
achieved by reducing the butter production (Savosnick, 2015).
How does the shape of the production possibilities curve reflect the law of increasing
opportunity costs?
The shape of the production possibilities reflects the law of the increasing opportunity
cost as the production slowly shifts from one product to the other and hence more resources are
required to increase the production of other products (Savosnick, 2015). Accordingly, the slope
of the line helps to represent the magnitude tradeoff.
Suppose this hypothetical economy were producing only 1 item of butter and ten guns, and
this was depicted by this production possibilities table and curve. What conclusions could
you draw about this economy's resource utilization?
Hypothetically if at all this economy was producing only one item of butter and ten items
of guns, we could make an assumption that butter production versus guns consumption is not
balanced which results in a less butter than what is expected with the creation of ten guns. In that
case, the change in resources would force a change in the slope over time (Savosnick, 2015).
Determine whether this economy can produce outside its current production possibilities.
Additional resources are needed to produce outside its current production possibilities
frontier. However, the economy does not have enough resources that combination of goods.
How might technological changes affect the production possibilities curve?
The technological changes might affect the productions possibilities curve by creating
extra resources which permits the production possibilities curve to increase potentially.
How can international trade allow consumption above its production possibilities curve?
The international trade which allows consumption will also let the curve to shift. In that
case, the economy cannot produce outside its current production possibilities (Savosnick, 2015).
However, by using the international trade consumption, it will bring extra resources together
with technology opportunities that will force changes to the current production possibilities
curve. Accordingly, the increase in production would push out and expand the production
possibilities frontier area.
Opportunity Cost
Analyze the concept of opportunity cost
1. Explain what is meant by opportunity cost
Opportunity cost is termed as the loss of potential gain from other alternatives when one
of the options is selected (Palmer & Raftery, 2014).
2. Explain how opportunity cost relates to the definition of economics.
In every business, each choice or the decision usually involves weighing of the costs of options.
For instance, if one alternative is chosen over the other then it is a cost to the choice of the
3. Determine if allocating advertising expenditures to boost sales or investing in a new
plant and equipment would entail the more significant opportunity cost. Explain
and support your response.
The allocation of funds to properly advertise products usually permits the firm an opportunity
to have more sale by allowing the potential buyers to be enticed by the product which is being
sold (Palmer & Raftery, 2014). Conversely, advertisements should also allow the buyers to
personalize and relate in some ways. The decision makers are always interested in measuring the
costs together with benefits of particular interventions, and hence at times they are presented
with the average value in conjunction with benefits of the alternative interventions and compares
The new intervention is always compared with the existing one, and the average cost is not
the most appropriate comparison other than the marginal costs of the new intervention (Palmer &
Raftery, 2014).
Marginal Cost v Marginal Benefit
Apply the concept of marginal cost and marginal benefit to real-world decisions. Provide
two examples of recent choices you made in which you, either explicitly or implicitly,
weighed marginal cost and marginal benefit
I have a friend of mine who currently drive a Honda Civic. However, each week he puts
approximately 200 miles on his car because of where he works (Schob, 2013). However, in his
town, there are three various types of fuel available at the shell station fuel pump namely shell v-
power, regular Ethanol and Ethanol. In that case, proper costs about 2.1 dollars per gallon. Plus
Ethanol expenses about 2.3 dollars, and finally, shell v-power costs 2.6 dollars. He usually uses
plus ethanol in his Honda to get the best highway mileage. As an illustration, the cost decisions
are the main reason why he uses this type of fuel (Schob, 2013).
There are several decisions to be made by the automobile owners. However, my friend
weighed the marginal benefits of the type of fuel needed for his car.
The other example of weighing marginal costs and the benefit is that my friend and I
work and at the same time study together. However, due to the fixed schedule we have, it is
always hard to cook every week. In that case, it would make more economic sense because we
are only two people. Accordingly, after working the whole day, it benefits us to eat out and allow
us to have more time for our busy timeframe (Schob, 2013).
Savosnick, K. M. (2015). The box diagram and the production possibility curve. Ekonomisk
Tidskrift, (r 3), 183-197.
Palmer, S., & Raftery, J. (2014). Economics notes Opportunity cost. BMJ: British Medical
Journal, 318(7197), 1551.
Schob, R. (2013). On marginal cost and marginal benefit of public funds. Public Finance=
Finances publiques, 49(1), 87-106.

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