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Production Possibilities
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-Every day a vast array of goods and services are produced
-Production capability is limited by available resources and technology
-We must make rational choices on scarcity of resources and technology:
-Fixed quantities of factors of production at any given time
-Fixed quantities of the state of technology at any given time
-Production capability is limited by available resources and technology
-We must make rational choices on scarcity of resources and technology:
-Fixed quantities of factors of production at any given time
-Fixed quantities of the state of technology at any given time
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Production Possibilites Frontier
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the boundary between the combinations of goods and services that can be produced and the combinations that cannot be produced, given the available factors of production and the state of technology
-Shifts when resource or technology changes
-Illustrates effects of scarcity and its consequences
-Shifts when resource or technology changes
-Illustrates effects of scarcity and its consequences
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Three Types of Production Possibilities
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-Attainable and Unattainable Combinations
-Efficient and Inefficient Production
-Tradeoffs and Free Lunches
-Efficient and Inefficient Production
-Tradeoffs and Free Lunches
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Attainable and Unattainable Combinations
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-Separates attainable and unattainable limits
-Can produce smaller or equal quantities of PPF, but never larger
-Attainable: on line or inside PPF (to left)
-Unattainable: outside PPF (to right)
-Can produce smaller or equal quantities of PPF, but never larger
-Attainable: on line or inside PPF (to left)
-Unattainable: outside PPF (to right)
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Efficient and Inefficient Production
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-Production efficiency: a situation in which the economy is getting all that it can from its resources and cannot produce more of one good or service without producing less of something else
-To be efficient, all factors of production must be employed; each resource assigned to the task it perfects
-In PPF (to left) is inefficient
-On PPF line is efficient
-To be efficient, all factors of production must be employed; each resource assigned to the task it perfects
-In PPF (to left) is inefficient
-On PPF line is efficient
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Trade Offs and Free Lunches
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-Tradeoff: an exchange - giving up one thing to get something else; a choice; PPF is an idea of a tradeoff; to produce more of one, you must produce less of another
-Free Lunch: a gift- getting something without giving up something else; only exists if production is inefficient
-On PPF line: face trade off
-Inside PPF: free lunch
-Free Lunch: a gift- getting something without giving up something else; only exists if production is inefficient
-On PPF line: face trade off
-Inside PPF: free lunch
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Opportunity Cost
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number forgone of other product divided by the number gained
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Opportunity Cost and Slope of the PPF
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-Magnitude of the slope of the PPF measures the opportunity cost
-The opportunity cost increases as the quantity of products produced increases
-The opportunity cost increases as the quantity of products produced increases
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Opportunity Cost is a Ratio
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-Opportunity cost of Product A = the ratio of Product B forgone to Product A gained
-Opportunity cost of Produce B= the ratio of Product A forgone to Product B gained
-Opportunity cost of a Product A is equal to the inverse of the opportunity cost of Product B
-Opportunity cost of Produce B= the ratio of Product A forgone to Product B gained
-Opportunity cost of a Product A is equal to the inverse of the opportunity cost of Product B
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Increasing Opportunity Costs Everywhere
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-Steep slope = increasing
-to make more of something, you must give up something else
-Every production activity has increasing opportunity cost
-constant opportunity: same slope on every point
-to make more of something, you must give up something else
-Every production activity has increasing opportunity cost
-constant opportunity: same slope on every point
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Economic Growth
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-Definition: the sustained expansion of production possibilities
-The economy grows with improved technology, labor and capital
-Consumption must decrease; short term loss for long term gain
-To study economic growth, we change the two goods and look at the production possibilities for consumption good and a capital good
-The greater the production of new capital, the faster the expansion of production possibilities
-Economic growth shifts the PPF onward
-To keep producing capital, current consumption must be less than its maxim possible level
-The economy grows with improved technology, labor and capital
-Consumption must decrease; short term loss for long term gain
-To study economic growth, we change the two goods and look at the production possibilities for consumption good and a capital good
-The greater the production of new capital, the faster the expansion of production possibilities
-Economic growth shifts the PPF onward
-To keep producing capital, current consumption must be less than its maxim possible level
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Absolution Advantage
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when one person (or nation) is more productive than another - needs fewer inputs or takes less time to produce a good or perform a production task
-How long it takes to produce a good
-How long it takes to produce a good
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Comparative Advantage
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the ability of a person to perform an activity or produce a good or service at a lower opportunity cost than anyone else
-How much of a good must be forgone to produce a unit of another good
-How much of a good must be forgone to produce a unit of another good
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Comparative Advantage Examples
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-Liz can make 15 smoothies or 15 salads in one hour; opportunity cost for producing 1 smoothie is 1 salad; opportunity cost for producing 1 salad is 1 smoothie
- Joe can make 6 smoothies or 30 salads in one hour; opportunity cost for producing 1 smoothie is 5 salads; opportunity cost for producing 1 salad is 1/5 of a smoothie
-Liz has a comparative advantage in producing smoothies
-Joe has a comparative advantage in producing salads
- Joe can make 6 smoothies or 30 salads in one hour; opportunity cost for producing 1 smoothie is 5 salads; opportunity cost for producing 1 salad is 1/5 of a smoothie
-Liz has a comparative advantage in producing smoothies
-Joe has a comparative advantage in producing salads
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Achieving Advantage from Trade
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-Liz & Joe work together: specialize in production
-Gains from trade results in total production increase by 10 smoothies and 10 salads
-Gains from trade results in total production increase by 10 smoothies and 10 salads