Chap. 2 - Production Process Flashcards
What is the Production Process?
The production process involves converting resources (aka: factors of production, or inputs) into goods and services.
What are the factors of production?
Land, Labor, Capital, Entrepreneurship
What is Capitalism?
Capitalism is a market system that relies on private property and the use of markets to answer the societal questions of what to produce, how to produce it, and for whom.
What is Socialism?
The government seeks to use the nation’s resources for all of its citizens, instead of letting the citizens use the resources in the manner they best see fit.
What is the Production Possibilities Frontier?
The production possibilities curve shows the maximum combination of two goods or services that can be produced given the present technology and resources.
Production Possibilities Curve reflects the __________ opportunity cost.
Marginal
The marginal opportunity cost measures the amount of a good that has to be sacrificed for each additional unit of the other good.
What is Marginal Opportunity Cost equal too?
Sacrifice/Gain
or
Rise/Run, the slope of the PPF
Why is there increasing marginal opportunity costs on a PPF?
The increasing marginal opportunity cost is due to the fact that some resources are better suited for producing one good than another.
What is allocative efficient?
The combination of goods and services most desired by society. In a market economy that combination is determined by supply and demand.
What factors enable a nation to consume beyond its PPF?
Growth, Greater Population, Discover of Resources, Capital Investment, Technology, and Free Trade
What factors cause an inward shift in the PPF?
Loss of Resources, War, Natural Disasters, and Disease
What is absolute advantage?
An individual or country has an absolute advantage in the production of a good when she/it can produce the good using fewer resources than another.
What is comparative advantage?
If an individual has a relatively lower marginal opportunity costs than another individual.
Where does the terms of trade need to lie for it to be mutually beneficial for both parties?
The terms of trade need to be between both opportunity costs of the producers.
Chino opp. cost = 1.5
Brum opp. cost = .33
.33<tt><1.5 Eg. TT = 1</tt>
Allan and Ryan live on an island. In one day, Allan can catch 10 fish per day or gather 5 coconuts, in the same amount of time, Ryan can catch 8 fish or gather 8 coconuts.
- Does either one have an absolute advantage in either good?
- Compute the marginal opportunity cost for each.
- Determine who has a comparative advantage in each good.
- Who should specialize in which good?
- Allan in Fish, Ryan in Coconuts
- Allan, the OC of 1 more fish is .5 coconuts
Ryan, the OC of 1 more fish is 1 coconut - Since Allan has a lower marginal opportunity cost for fishing compared to Ryan, he has a comparative advantage and should specialize in fishing . Ryan has a comparative advantage in gathering coconuts since he only gives up one fish while Allan must give up 2 fish per coconut.
