Analyzing Supply and Demand Essay

1192 Words Sep 14th, 2015 5 Pages
Analyzing Supply and Demand

The production possibilities curve displays the different combinations of two goods or services that can be produced in a full production economy with full employment, with the availability of fixed resources and fixed technology. It is a production frontier due to its display of the limit of attainable outputs (Rittenberg & Tregarthen, 2008, p. 52).
The law of increasing opportunity costs states that as production of goods increase, the opportunity cost of producing another item also increases. Because many resources are not adaptable to other uses, one resource may be helpful in producing butter, but not be useable in the production of guns. According to the law of demand, with an increase in price
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The cost of producing two more guns would be one pound of butter, and the cost of producing three more guns will be two pounds of butter.
The law of increasing opportunity costs states that as you increase the production of a good, the opportunity cost to create that good will also increase. The bowed shape of the production possibilities frontier demonstrates that the opportunity cost of a good in relation to the other depends on the amount of each good the economy is producing. When there is full employment, producing more of one good, demands the decreased production of another good. Because economic resources are not equally efficient in producing all goods and services, there are increasing costs of production. Moving down the frontier, it is evident that to produce more of an item, we must give up more and more of another item (Salvatore, 2003).
If this economy were only producing one pound of butter and ten guns, this demonstrates that the economy’s resource utilization is inefficient. This tells us that some resources may be either unemployed or underemployed. Resources are not equally efficient in producing all goods. For instance, a specific resource may not be equally productive when producing an alternative good. The substitution of resources may be due to differences in labor skills and specialized functions of machinery and/or buildings. When new resources are allocated to produce more guns

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