Question

On a production possibilities curve, the opportunity cost of good \(X\) in terms of good \(Y\) is represented by a. the distance to the curve from the vertical axis. b. the distance to the curve from the horizontal axis. c. the movement along the curve. d. all of the above.

Short answer

The correct answer is: \(c. the movement along the curve.\) This is because the opportunity cost of producing good \(X\) in terms of good \(Y\) is represented by the movement along the production possibilities curve, which illustrates the trade-off and the cost of giving up some units of good \(Y\) in order to produce more units of good \(X\), or vice versa. The slope of the curve indicates the opportunity cost.

Step-by-step solution

Option a

The distance to the curve from the vertical axis does not properly represent the opportunity cost of good X in terms of good Y. This distance simply represents the quantity of good Y produced, but it does not indicate the trade-off between the two goods.

Option b

The distance to the curve from the horizontal axis also does not properly represent the opportunity cost of good X in terms of good Y. Like option a, this distance merely reflects the quantity of good X produced and does not illustrate the trade-off between the two goods.

Option c

The movement along the curve represents the opportunity cost of producing good X in terms of good Y. This movement illustrates the trade-off and the cost of giving up some units of good Y in order to produce more units of good X, or vice versa. The slope of the curve indicates the opportunity cost.

Option d

Since option c is the correct answer, option d cannot be correct as it includes all the other options, which have been demonstrated to be incorrect. Therefore, the correct answer is: c. the movement along the curve.

Key concepts

Opportunity Cost

Opportunity cost is a key economic concept that describes the cost of forgoing the next best alternative when making a decision. In simpler terms, if you decide to spend your time or resources on one option, you're giving up the chance to use them on another option. It's about understanding what you must give up to get something else.
This is often visualized on a production possibilities curve (PPC), where you see trade-offs between two goods. When moving along this curve, the opportunity cost comes into play as you choose to produce more of one good at the expense of less production of another.
The slope of the PPC shows how much of one good you need to give up to gain an additional unit of the other good. For instance, if producing more of good X means producing less of good Y, the amount of Y you are giving up is the opportunity cost of choosing more X.

Trade-off

In economics, trade-off refers to the decision-making process that involves balancing between two or more competing options. Every choice involves trade-offs because there's always an alternative that you're not selecting. In other words, whenever you choose one alternative over another, you're facing a trade-off.
The production possibilities curve illustrates this concept through its representation of different combinations of two goods that can be produced, given finite resources.

• When resources are shifted from producing good X to good Y, less of good X is produced and more of good Y, illustrating a trade-off.
• Trade-offs can be calculated, just like opportunity cost, as they quantitatively define the essence of economic choice.

Understanding trade-offs can help both businesses and individuals make better decisions, leading to more efficient use of resources.

Economic Models

Economic models are simplified frameworks designed to illustrate complex economic processes. They use tools like graphs, equations, or simulations to predict and analyze behaviors and outcomes in an economic system. The production possibilities curve is a well-known type of economic model.
Such models help economists and policymakers understand potential outcomes and make informed decisions.

• By showcasing possible production levels of two goods, the PPC helps analyze how shifting resources impacts these levels.
• Economic models can vary from simple abstractions, like the PPC, to intricate simulations involving numerous variables.

These models are instrumental in teaching foundational economic principles, and despite their simplicity, they provide valuable insights into real-world economic activities.