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Specialization
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the concentration of the productive efforts of individuals and firms on a limited number of activities
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Exchange
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people giving up something in order to receive something else they would rather have
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when an economy chooses a point inside production possibilities frontier, it can produce more or less goods by using all resources?
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more goods
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Trades can be driven by self-interest because
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everyone gets more of the things they want than they would if they were self-sufficient
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The two main factors that drive the change in the US production possibilities are
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- number of workers
- changes in technology
- changes in technology
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In the 1800's the US had a comparative advantage in clothing due to
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new technology and cheap labor
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when a country can produce more of a good or service
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absolute advantage
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when a country can produce a good or service at a lower opportunity cost
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comparative advantage
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production possibility frontier (PPF)
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a curve depicting all maximum output possibilities for two goods, given a set of inputs consisting of resources and other factors. The PPF assumes that all inputs are used efficiently.
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based on the assumption of efficiency, we can predict an economy will chose to produce when on a frontier?
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at a point
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Production possibilities frontier shows
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- all the possible combinations of outputs that can be produced using all available resources
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efficient production uses what
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the maximum amount of they squeeze the most output from all available resources
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Adam Smith
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an 18th century thinker who suggested the term invisible hand to describe coordinating economic mechanisms
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An Invisible Hand
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- assumed functions include free competition and full information
- when individuals seek to make a profit and specialize accordingly to their comparative advantage
- when individuals seek to make a profit and specialize accordingly to their comparative advantage
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when producers specialize in making a particular good according to their comparative advantage, total production possibilities
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are greater than if each produced the combination of goods they themselves want to consume
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gains from trades
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the improvement in outcomes that occurs when producers specialize and exchange goods and services
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Points inside the production possibilities frontier (PPF) are what?
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achievable but do not make full use of all available resources
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absolute advantage
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the ability to generate more output than others with the given amount of resources
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When a production possibilities frontier is concave
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opportunity costs are increasing
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opportunity cost of a good
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the amount of the other goods that must be given up to produce it
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the production possibilities frontier (PPF) answers the question "what are the wants and constraints involved?" by showing
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all possible combinations of outputs that can be produced with idea resources
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the production possibilities frontier (PPF) represents what on production?
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constraints
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if we specialize in the good for which we have a comparative advantage and trade for the other good, what is possible?
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to consume at a level beyond our own production possibilities
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when specialized producers exchange goods, outcomes improve because of what?
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gains from trade
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how does the PPF answer "what are the trade offs?"
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along the PPF, in order to get more of one thing, you must give up some of another thing
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a problem with specialization in production
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each producer may end up with only one good
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changes in comparative advantage often result in what?
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economic growth
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assume all workers produce different amounts of each good. the opportunity cost of producing one good in terms of the other does what?
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increases are more of a good is produced, because skills vary among workers
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there is room for trade when among countries when
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opportunity costs to produce a good differ, and a trading price falls between those costs
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without trade, points that lie outside the production possibility frontier are
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unattainable
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points that lie on the PPF are called what
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efficient
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along a straight line production possibility curve, the slope of the line measures what?
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the opportunity cost of one good in terms of the other
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geographic shifts in the clothing production has occurred because
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relatively lower costs of production
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marginal rate of transformation (MRT)
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- The numerical value of the slope of the PPF
- The slope defines the rate at which production of one good can be redirected (by reallocation of productive resources) into production of the other.
- The slope defines the rate at which production of one good can be redirected (by reallocation of productive resources) into production of the other.
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Numerical Value of Opportunity cost
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the ratio of what you are sacrificing to what you are gaining
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When technology improves production of one good, the PPF shifts how?
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pivots outward
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When there is an increase in resources used to produce a good, the PPF shifts how?
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right/outward
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When the working population decreases, the PPF shifts how?
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left/inward
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