Samuel Yang

Period 2B
Unit 1 Problem Set
1. A) Scarcity: The limited nature of societys resources. Because
economic resources are scarce, we have to make trade-offs in
production.
B)
I. Tradeoffs: All alternatives that we give whenever we chose one
course of action over others. (Example: the trade-off of going to
the movies are time to do homework, extra sleep, and going to
swim practice)
Opportunity-Cost: The most desirable alternative (The
opportunity-cost of going to the movies is doing homework since
homework is due the very next day, while catching up on sleep
II.

can be done anytime)

Cost: what it takes in resources to produce a product or service
(Ex. It costs Starbucks $1 to make a Frappuccino)
Price: what someone is willing to pay for that product or service.
Cost is a supplier phenomenon while price is a consumer

III.

phenomenon. (Ex. We pay Starbucks $4 for a Frappuccino.)

Normative and Positive Economics: Positive economics is
objective and fact-based, while normative economics is
subjective and value based. An example of positive economics is
the statement The building of highways increases public
expenditures because it can be proved or disproved by
examining where the money to build highways comes from. On

the other hand, the statement it should be the duty of the

federal government to build and maintain highways is a
normative economic statement, because it is an opinion and
IV.

cannot be proved.
Consumer and Capital Goods: Capital goods are goods used in
production while consumer goods are those for the final
consumer. For instance, a combine harvester is a capital good,

V.

while bread is a consumer good.

Allocative and Productive Efficiency: Productive efficiency is
producing goods and services for the lowest cost, while allocative
efficiency is when the products produced are ones most wanted
by society. For instance, it is not allocatively efficient to build
robots instead of pizzas when the country is starving, even when
the robots are produced with productive efficiency (lowest cost

possible).
2. A) If Ford produces at combination A, all the production goes toward
the construction of cars. The opposite is true at combination G, where
only trucks are being produced. Neither outcome is desirable because
some consumers want cars while others want trucks.
B) Point X is impossible at this time because we do not have the
resources/technology to construct 40 cars and 50 trucks at a time, and
so is above the curve. Point Y is inefficient because it is below the
curve.

C) The opportunity cost of constructing a certain amount of cars is the

decrease of production of a certain number of trucks. For instance, the
opportunity cost of constructing 20 trucks instead of 0 trucks is 2 cars. Every
point along the curve represents the most efficient use of resources by the
economy. For instance, both producing 54 cars and 0 trucks and 52 cars and
20 trucks are considered efficient. When we have unemployment, we are not
producing inefficiently; Ford is not producing at its maximum capability;
resources that could be used for production are not being used. The law of
rising opportunity cost states that as we increase production, cost increases
as well. True enough, as more and more trucks are being produced, we are
producing less and less cars. Economic growth is indicated by an outward
shift of the production possibilities curve, which is achieved by increasing the
quantity or quality of goods or discovering new technology. For instance, if
Ford researches a cheaper material for car/truck frames, the curve would
shift outwards indicating economic growth.
3. A) Opportunity cost is 5 guns for both a to b and b to c. We can infer
that PPF-A has a consistent opportunity cost and so the graph is linear.
B) Opportunity cost is 0.5 from a to b and 8 from c to e. The per unit
opportunity cost is 3 from c to d and 5 from d to e.
C) PPF-B shows increasing opportunity cost. For instance, the per unit
opportunity cost is 3 from c to d and 5 from d to e.

D) 1. New gun-making technology that allows us to make more guns

for the same/lower cost
2. Discovery of new gun-making/butter-making material allows for
more of each to be made
3. An improvement in productivity and efficiency from available
resources