chapter 2 - economic problem

Question 1

The budget line/budget constraints

Answer 1

Imagine a line on a graph that tells you what you can buy with your money.

It shows you all the different pairs of two products you can purchase, considering how much money you have and the prices of the products.

Question 2

Individual economic problem

Answer 2

we have a lot of wants but not a lot of income

Question 3

efficiency

Answer 3

refers to the exhaustion of your income

Question 4

slope of PPF

Answer 4

tells us the opportunity cost (constant)

Question 5

Production possibilities frontier(PPF)

Answer 5

It’s like a border that shows what we can and cannot produce with our resources.

Anything inside the border represents the combinations of goods + services that we can currently produce with our current resources

Anything outside the border is currently unattainable with our existing resources

Question 6

Every choice along the PPF involves a ____ ?

Answer 6

tradeoff

Question 7

why are points that lie on PPF efficient?

Answer 7

• each point along the curve represents a combination of goods + services that use all the resources available
• if ur at a point on the PPF, it means your using all the resources efficiently to produce goods + services without wasting any resources
• this level of efficiency is needed to max out production

Question 8

how do we determine which alternative efficient quantities to make?

Answer 8

need to compare cost + benefits

Question 9

what does PPF determine?

Answer 9

helps us understand the oppurtunity cost, which is what we have to give up in order to make more of something else

Question 10

the marginal cost of goods/service

Answer 10

cost of making one more unit of it

ex: if u have pizza shop the marginal cost of producing one more pizza would include the cost of additional ingredients (like cheese, sauce, and toppings), additional labor to make the pizza, + any other variable costs associated with production.

Question 11

Marginal benefit

Answer 11

how much ur willing to pay for an additional unit of the good/service

Question 12

Principle of decreasing marginal benefit

Answer 12

The more you have of something you like, the less each additional one matters to you.

So, as you get more of something, you’re willing to pay less for each extra one.

Question 13

Marginal benefit curve shows

Answer 13

shows the benefit of having more of something changes as u consume more

because as you consumer more of a good the curve basically shows us that our sanctification/benefit of that good changes with each additional unit consumed

Question 14

when is production efficiency achieved

Answer 14

when u cant make more of any good without giving up another good (bc you’ve used up all the available resources effeicvtly)

Question 15

when is allocative effiency achived

Answer 15

MB=MC

Question 16

economic growth

Answer 16

1. we can make more things than we have choices (people have more choices in when they wanna buy stuff)
2. when the standard of living for people in a country improves(people have more money, better jobs…)

Question 17

2 factors that influence economic growth

Answer 17

1. technological change- when we make new things or find better ways to make what we already have
2. capital accumulation- growth of capital resources

Question 18

oppurtunity cost of exonomic grwoth

Answer 18

its what we give up to have economic growth

it means we might have to sacrifice fun stuff to invest things better for the future

Question 19

economic growth = not free

Answer 19

true

Question 20

point of allocative efficency

Answer 20

a point on the PPF where marginal benefit (what we gain from producing one more unit of a good) equals the marginal cost (the cost of making that one additional unit of good/service)

Question 21

Let’s consider a simple example to illustrate allocative efficiency using marginal cost:

Imagine a small bakery that produces cupcakes. The bakery is currently deciding whether to produce one more batch of cupcakes.

Answer 21

Marginal Cost (MC): The bakery calculates that producing one more batch of cupcakes would require additional ingredients such as flour, sugar, and eggs, as well as additional labor and energy costs. The total cost of these resources and efforts represents the marginal cost of producing one more batch of cupcakes.

Marginal Benefit (MB): The bakery estimates that selling one more batch of cupcakes would bring in additional revenue, which represents the marginal benefit of producing one more batch.

if the balery finds that the MB of making one more batch is equal to the MC of producing that batch then you’ve achieved allocative efficiency

which means that the bakery is using there resources and making the cupcakes at a point where the benefits= costs

if the bakery findss that the MB of making one more batch is more than the MC then they might decide to make more cupcakes since each extra batch leads to them making more revenue than what it costs to bake more batches of cupaceks

if the opposite were to happen they could scale back the amount of cupcakes they ,aek

Question 22

resource allocation

Answer 22

ecnomic growth ruires a tradeoff

Question 23

gains from a trade

Answer 23

This means that when people specialize in what they’re good at and trade with others, everyone can get more of what they want.

Question 24

comaprtive advantage

Answer 24

if you can make smoothies with less effort/resources than other –> u have comparative advantage in making smoothies

it also means you can make smoothies at a lower opportunity cost comapred to others

Question 25

absolute advantage

Answer 25

when someones better/more efficeng at doing something compared to others

Question 26

diff between absolute and comparitve advantge

alice can make 20 cookies in 20 mins and bob can only make 5 in 20 mins (so alice has abs advantage)

Answer 26

ABSOLUTE- someones better at making soemthing

comparative- soemoen who gives up less when they make something

Question 27

• scarcity
• attainable and unattainable points
• opportunity cost
• the tradeoff between producing one good versus another

Answer 27

concepts that are shown by PPF

Question 28

If Sam is producing at a point inside his production possibilities frontier, then he

Answer 28

can increase production of both goods with zero opportunity cost.

Question 29

If Sam is producing at a point on his production possibilities frontier, then he

Answer 29

can increase the production of one good only by decreasing the production of the other.

Question 30

A production possibilities frontier is negatively sloped because

Answer 30

any choice along the PPF involves a tradeoff.

Question 31

On a graph of a production possibilities frontier, opportunity cost is represented by

Answer 31

the slope of the production possibilities frontier.

Question 32

The bowed-out (concave) shape of a production possibilities frontier illustrates

Answer 32

increasing opportunity cost.

Question 33

Sal sells hot dogs and hamburgers. The price of a hamburger is $5 and the price of a hotdog is $2. Sal’s opportunity cost of producing 1 hamburger is 3 hot dogs. What is Sal’s opportunity cost of producing 1 hot dog?

Answer 33

1/3 hamburger

Question 35

A pizza parlour that is production efficient produces pizza and panzerotti along a straight-line PPF. One point on its PPF is 10 pizzas and 2 panzerotti. Another point on its PPF is 8 pizzas and 5 panzerotti. If the pizza parlour increases the quantity of pizza it produces from 8 to 10, what is the opportunity cost of producing one of the additional pizzas?

Answer 35

1.5 panzerotti

Question 36

The most anyone is willing to pay for another purse is $30. Currently the price of a purse is $40, and the cost of producing another purse is $50. The marginal benefit of a purse is

Answer 36

$30.

Question 37

A florist is producing a quantity of bouquets at which marginal benefit exceeds marginal cost. Is the florist attaining allocative efficiency?

Answer 37

No. The florist must increase production to attain allocative efficiency.

Question 38

How does allocative efficiency relate to the PPF?
The allocatively efficient point is

Answer 38

the point on the PPF at which marginal benefit equals marginal cost.

Question 39

Debra has an absolute advantage in producing administrative services when she

Answer 39

can produce more administrative services than anyone else, using the same quantity of inputs.

Question 40

In an eight-hour day, Antony can produce either 24 baguettes or 8 kilograms of cheese. In an eight-hour day, Rudolph can produce either 8 baguettes or 8 kilograms of cheese.

Given Fact 2.3.1, the opportunity cost of producing 1 baguette is

Answer 40

1/3 kilogram of cheese for Antony and 1 kilogram of cheese for Rudolph.

Question 41

Economic growth ________ overcome scarcity because ________.

Answer 41

does not; we can produce more goods and services but it is still impossible to satisfy all our wants