CHAPTER 2

Question 1

PPF

Answer 1

production possibilities frontier. tells us the maximum quality of good A that can be produced for each quantity of good B produced(vice versa)

Question 2

point outside of frontier

Answer 2

unattainable with the technology and resources at the economy’s disposal

Question 3

increasing opportunity cost

Answer 3

greater oc along the PPF. “the law of increasing opportunity cost. the more of sth we produce, the greater the OC of producing even more of it.

Question 4

The law of increasing opportunity cost

Answer 4

Most resources are better suited to some purpose than others.

Question 5

operating within the PPF

Answer 5

resources are not being used in the most productive way

Question 6

productive efficiency

Answer 6

absence of any productive inefficiency

Question 7

examples of productive inefficiency

Answer 7

empty seats on an airline flight

starbucks -> moving whipped cream and caramel drizzle closer to reduce preparation time

Question 8

Operating within ppf by recession

Answer 8

slowdown in economic activity, many resources are idle. workers without jobs
factories shut down- inefficient use of resource(capital)

Question 9

Economic growth(PPF)

Answer 9

greater productivity, ppf outwards due to

1. increase in productive capacity of economy
2. technological advance

Question 10

Consumption vs Growth(capital)

Answer 10

capital is a resource to produce goods and service
itself is a resource, using resources!

Capital is long lasting, but resources this year is sacrificed. = less consumer goods.

Question 11

How to produce more goods and services in the future?

Answer 11

shift resources towards Research and Development and capital production.

Question 12

Economic interdependance

Answer 12

everyone is producing goods and service for other people.

Question 13

specialization

Answer 13

a method of production in which each person concentrates on a limited number of activities

Question 14

exchange

Answer 14

the act of trading with others to obtain what we desire

Question 15

specialization and exchange

Answer 15

enables us to enjoy a greater production and higher living standards than would otherwise be possible. as a result, all economies exhibit high degrees of SnE

Question 16

Gains from specialization and exchange

Answer 16

1. development of expertise
2. minimise downtime
3. comparative advantage

Question 17

Comparative advantage

Answer 17

the ability to produce a good or service at a lower opportunity cost.

Question 18

absolute advantage

Answer 18

absolute advantage by using less resources to produce goods and services than the other individual

Question 19

Total production of every good or service will be greatest when

Answer 19

individuals specialize according to comparative advantage.

Question 20

resource allocation problem

Answer 20

deciding how society’s scarce resources will be divided among competing claims and desires

Question 21

resource allocation questions

Answer 21

1. which goods and service should be produced with society’s resources?
2. how should they be produced? how much capital used
3. who should get them?
   - -> politics.

Question 22

Traditional Economy

Answer 22

resources are allocated according to long lived practices from the past

Question 23

Command Economy

Answer 23

resources are allocated mostly by explicit instruction from some higher(central) authority
ex) North Korea, Cuba

Question 24

Market Economy

Answer 24

resources are allocated through individual decision making.

freedom of choice is proportional to the amount of resource one controls.

Question 25

how are resources allocated in a market economy?

Answer 25

market price

Question 26

Market

Answer 26

A group of buyers and sellers who have the potential to trade with one another.

Question 27

Price

Answer 27

The amount of money a buyer must pay to a seller for a good or service. Confronts individual decision makers with the costs of their choices.

Question 28

price is not the same as cost

Answer 28

cost = total sacrifice needed to buy a good, but price is a significant part of cost

Question 29

OC of society making a car is

Answer 29

converted to an OC to an individual

Question 30

important

Answer 30

when resources are allocated by the market, and people must pay for their purchases, they are forced to consider the opportunity cost to society of the goods that they consume. In this way, markets help to create a sensible allocation of resources.

Question 31

Market and Capitalism

Answer 31

market describes how resources are allocated

capitalism is a way resources are owned.

Question 32

capitalism

Answer 32

resources are owned by private citizens. free to sell or rent

Question 33

socialism

Answer 33

resources are owned by the state i.e. Soviet Union

Question 34

private ownership of resources incentivises

Answer 34

individuals to make careful decision

Question 35

trade in market is voluntary

Answer 35

no trade is made unless both sides benefit. resources are used to make others better off.

Question 36

producers income only when

Answer 36

product is useful and demanded

Question 37

buyers buy things only when

Answer 37

it is the most incentive

Question 38

mixed economics

Answer 38

market economy in which the government plays an important role in allocating resources

Question 39

why is market simple and complicated at the same time?

Answer 39

simple - no rules or command to be memorized. no concern about allocation of resources.

complicated - resources are allocated indirectly. Hard to predict individual behavior and allocation of resources.