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Running head: ECONOMICS 1

Economics

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ECONOMICS 2

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

ECONOMICS 3

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?

ECONOMICS 4

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

replacement

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

ECONOMICS 5

with the average value in conjunction with benefits of the alternative interventions and compares

them.

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).

ECONOMICS 6

References

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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