Production Possibilities Production Possibility Curves Are Representation Essay

  • Length: 6 pages
  • Sources: 3
  • Subject: Economics - International Trade
  • Type: Essay
  • Paper: #72793006

Excerpt from Essay :

Production Possibilities

Production possibility curves are representation of the amount of two different goods that can be obtained by shifting resources from the production of one, to the production of the other. In addition, the graph represents maximum specified production level of one commodity that results given the production level of the other (Samuelson, 1962). The curve is used to describe consumers' choice between two different goods.

The curves represent a wide range of economic factors; scarcity, opportunity costs, and choice. According to the curve, scarcity is the fundamental economic problems all societies face; opportunity cost being the cost of anything used in the production in terms of what has to be given; these costs could be financial, but they could include individuals' time and other intangibles. Besides, the possibility curve shows two products and the consumer has the choice to choose the best one between them.

An individual earning $30,000 with the option to either buy an apartment or buy a car is likely to buy the apartment. This choice is made to satisfy the higher social and achievement needs within the society. Besides, there are few apartments and everybody cannot purchase them. Thus, investing in an apartment is seen as a higher preference and most likely to be chosen by the individual as opposed to the car. The apartment's value increases with time while the car depreciates making investing in the apartment worth being the first choice.

By returning to school and earning a degree, an individual has several opportunities. Courses in computer programming could mean much more to their paycheck than a bachelor's degree in liberal arts. The time taken by going back to school as well as the effort, and money is likely boost self-confidence. This opportunity presented makes going back to school a better choice for most individuals.

Graphing Changes to Demand

There are several factors that cause changes in demand as well as shift of a demand curve. These factors include changes in disposable income, shifts in consumers' tastes and preferences and changes in expectations as well (O'Sullivan & Sheffrin, 2003). In addition, changes in the prices of substitutes and complements goods are likely to bring changes in demand. Population size and composition is the other factor that influences the demand of any product.

The negative slope of the curve means people are willing to buy more of a service, product, or resource as its price falls. Whenever the prices of apartments fall due to recession and other economic difficulties, more owners will be disposing off their products thus increasing the market demand and vice versa. The price buyers are willing to pay depends on the utility. However, the demand directly depends on the income of an individual while the utility does not. Thus it may change indirectly due to change in demand for other commodities.

Oil and Gas Industry in Alberta

Alberta provides a lot of Canada's oil and gas. The region offers tremendous opportunities for companies involved in the extraction and processing of energy resources as well as other companies such as engineering, and manufacturing among others.

Alberta's technologies and services are in demand all over the world and generate billions of dollars in revenues each subsequent year (Government of Alberta, 2012). Although fossil fuels still dominate the world energy mix, higher environmental and regulatory standards are challenging the industry to find new and improved ways to enhance productivity related to upstream exploration and development.

With conventional oil production peaking in 2006, Alberta's oil industry is under significant pressure to increase production output. The production and export of natural gas is also critical to the province's economy. Like conventional oil, conventional gas has also peaked and is now on the decline. This places significant pressure Alberta's unconventional gas industry to meet current and future demands.

Law of Diminishing Returns

Ensuring manufacturers print cigarette packs with pictures illustrating the presumed effects of tobacco related diseases makes the debate more valid. This would increase public awareness of cigarette effects as 30% of the front of cigarette packs and 40% of the back will be used. Increasing taxations on cigarette is also vital. Tax increases have greatly reduced cigarette making this point strength to the debate.

Persuading smokers who have already quit makes the intervention useless which is a demerit of the debate. Thus, smokers remain untouched requiring higher disincentive before they quit. In addition, numerous advices, warnings ad threats dilute the debate since they are ignored by most individuals.

The government is realizing diminishing returns as most consumers are smuggling approximately 8% of cigarettes thus reducing taxations. However, the problem is increasing which would lead to further low returns on cigarettes.

The government should not impose stringent rules on cigarette smoking such as high taxes and bans (Lemieux, 2001). In addition, cigarette should be sold at lower prices packaged in plain wrappers; this may help reduce opposition from smokers and having talks with them can be successful.

The supply and demand of tobacco cannot be lowered by government interventions as seen in this article. In line with this, smokers overestimate the risks of smoking as evaluated by the public health literature making the flow of cigarettes from manufacturers likely to increase in the near future.

Imposing taxations on cigarettes is a way of making smokers may sin taxes. Tobacco smoking is viewed by most people as a sin which has led to the increasing size and aggressiveness of government warnings on tobacco products. This is also seen in the increasing taxations and stringent measures imposed on cigarette smoking.

Long Run Costs and Economies of Scale

Long-Run Average Total Costs (LRATC) = Total Costs / Quantity






























The downward sloping portion shows economies of scale. This occurs up to an output of 5. The horizontal portion shows constant returns to scale; from units 5 to 6. The upward sloping portion shows diseconomies of scale that exist as output is expanded beyond 6 units.

Notice that the isoquant curves are negatively sloped and do not intersect. They are downward sloping reflecting the inverse relationship between the use of labor and materials employed in producing a given quantity of output. That is, as more labor is employed then fewer materials are needed to produce the same output level.

The isoquant curve that lies farthest from the origin implies the greatest production level. This is because more labor and materials are employed by an isoquant curve which lies farther to the right. Indeed, isoquant q3 is a greater output level than isoquant q2, which in turn is a greater output level than that given by isoquant q1 (McGraw-Hill Higher Education, 2003 ).

The isocost line will now have a slope of - 0.8 = - Price of labor/Price of materials = - 40/50. The new isocost line has the same vertical axis intercept. However, the horizontal axis intercept is now 10.

The targeted production level is given by the isoquant q0 (suppose it is 850 T-shirts, or something else produced). The isocost line that is just tangent to this isoquant curve will give us the least-cost combination of inputs (L1 units of labor and M1 units of materials) to employ in order to produce this targeted production level (such as 850 T-shirts).

Isocost line 1 will not afford us the amount of labor and materials to reach the targeted production level. Isocost line 3 enables us enough labor and material to produce the targeted production level, but it implies more money is spent by the firm than Isocost line 2; and we want to minimize our costs in producing our production target.

Economies of Scale and Scope

I would create a retail business store retailing men and women clothing. Retailing in clothing and footwear is a lucrative investment with high returns making investing in this field easier and rewarding. The retail should have four off-store shops selling branded apparel housed in 1,000 square feet buildings. This business targets both men and women between 35 to 64 years old, with incomes of less than $50,000 per year.

The company will be headquartered in Upper Saddle River, New Jersey requiring initial capital of approximately $12 billion employing about 100 people within the stores. The firm will market its products under its own brands; Vitro, Parky, Cooley as well as Supra Golf.

The firm's first store, Point-of-View will sell cheap apparel some retailing as low as $100. The clothes available in this store are mainly made of wool. In the second store, Focus Point, customers are treated to a wide range of leather and woolen clothing. In addition, the store's pricing ranges from between $400 to approximately $250. The third store; Studio 121 sells clothes made of fur as well a leather jackets. These clothes are mostly high end retailing at prices higher than $500. The final store, Rooster, will be selling clads…

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"Production Possibilities Production Possibility Curves Are Representation" (2012, October 19) Retrieved January 16, 2017, from

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