Chapter 2 - Choices and trade offs in the market

Question 1

Production possibility frontier

Answer 1

A curve showing the maximum attainable combination of two products that may be produced with available resources.

Question 2

Within the frontier

Answer 2

Combinations are inefficient

Question 3

Outside of the frontier

Answer 3

Combinations are unattainable

Question 4

The most efficient combination

Answer 4

is on the frontier curve

Question 5

Opportunity cost

Answer 5

The highest value alternative that must be given up to engage in an activity. Eg. The opportunity cost of making one car is the number of the other car that the company wants to produce

Question 6

Concave -

Answer 6

Is a frontier curve that is sloped outwards.

Question 7

Moving down the production possibility frontier

Answer 7

increases the marginal opportunity cost.

Question 8

The more resources already devoted to an activity,

Answer 8

the smaller the pay off to devoting additional resources to that activity

Question 9

Economic Growth

Answer 9

At any given time the total resources available to any economy are fixed. An increase in labour and capital causes the production frontier to shift outwards.

Question 10

Technical advances

Answer 10

Technical advances make it possible to produce more goods with the same labour and machinery. It also shifts the production frontier outwards.

Question 11

Trade

Answer 11

The act of buying or selling a good or service in a market. Eg. Ultimately a nurse is trading a service for a good.

Question 12

Absolute advantage

Answer 12

is the ability to produce more of a good or service than other producers using the same amount of resources.

Question 13

Comparative advantage

Answer 13

The ability of an individual or firm to produce a good or service at a lower opportunity cost than other producers.

Question 14

The basis for trade is

Answer 14

comparative advantage , NOT absolute advantage.

Question 15

Product markets

Answer 15

Markets for goods, such as computers, and services, such as massages.

Question 16

Factors of production

Answer 16

Labour, capital, natural resources, and entrepreneurial ability used to produce goods or services.

Question 17

Factor markets

Answer 17

Markets for the factors of production. I.e. labour, capital.

Question 18

In factor markets

Answer 18

households are suppliers and firms are demanders. This is because most people earn their income from selling their labour.

Question 19

Price mechanism

Answer 19

The system in a free market where price changes lead to producers changing production in accordance with the level of consumer demand. I.e. the invisible hand.

Question 20

Entrepreneur

Answer 20

Someone who operates a business, bringing together the factors of production - labour, capital, and natural resources - to produce goods and services.

Question 21

Property rights

Answer 21

The rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it. I.e. overseas robberies example.