Chapter 2: The Economic Problem Flashcards

1
Q

what is a trade-off

A

increase in production of one good, must decrease our production of something else (trade-off)

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2
Q

Production Possibilities Frontier (PPF)

A

boundary between those combinations of goods & services that can be produced & those that cannot

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3
Q

Points outside the frontier are _______.
Points Inside the frontier are ______.

A
  1. unattainable
  2. attainable
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4
Q

Production efficiency

A

producing goods & services at the lowest possible cost

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5
Q

Unused resources are ____.

A

Idle
E.g. leave factories idle or workers unemployed when they could be working

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6
Q

Resources are _misallocated____ when _____.

A

they are assigned to tasks for which they are not the best match
E.g. assign pizza chefs to work in cola factory; more production is done if roles assigned accordingly

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7
Q

RECAP: what is opportunity cost? Explain using PPF

A

of an action is the highest valued alternative forgone
2 goods along the PPF - one alternative is forgone for some quantity of the other
E.g. produce more pizzas we must produce less cola; opportunity cost of producing an additional pizza is the cola we must forgo

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8
Q

How does opportunity cost increase?

A

increases as quantity of good produce increases

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9
Q

Opportunity cost is a ____.

A

ratio - decrease in the quantity produced of one good divided by the increase in the quantity

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10
Q

What is allocative efficiency?

A

goods & services produced at the lowest possible cost & in quantities that provide the greatest possible benefit

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11
Q

RECAP: what is marginal cost?

A

opportunity cost of producing one more unit of it
E.g. as quantity of pizzas produced increases, the PPF gets steeper & marginal cost increases

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12
Q

How is the marginal benefit measured?

A

Measure by the most that people are willing to pay for an additional unit of it

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13
Q

What is the principle of decreasing marginal benefit?

A

more we have of a good/service, the smaller the marginal benefit & less willing to pay for an additional unit

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14
Q

Marginal benefit decreases due to_____

A

variety - more we consume, the more tired we get & prefer to switch to something new
E.g. if pizza is hard to get & you can only have a few slices a year, may be more willing to pay a high price for additional slices

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15
Q

What is a specialization?

A

Producing only one good or a few goods

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16
Q

What is the difference between comparative advantage & absolute advantage

A

Comparative Advantage - person has it in an activity if they can perform the activity at a lower opportunity cost than anyone else
Absolute Advantage - person who is more productive than others (compares production per hour) - can produce more of something than others using the same amount of resources

17
Q

What is economic growth?

A

Expansion of production possibilities
Increases our standard of living; doesn’t overcome scarcity & avoid opportunity cost

18
Q

Where does economic growth originate from?

A

Tech change - development of new goods & better ways of producing goods & services
Capital Accumulation - growth of capital resources (i.e. human capital)

19
Q

How do we expand production possibilities?

A

devote fewer resources to producing current consumption goods & services & allocate resources to accumulating capital & developing new tech

20
Q

List 2 economic coordination sx

A
  1. Central Economic Planning
  2. Decentralized Coordination
21
Q

Describe why central economic planning is a poor coordination sx

A

○ Planners don’t know people production possibilities & preferences
○ Production occurs inside PPF (inefficient); wrong things produced

22
Q

What are 4 aspects that make decentralized coordination the best choice sx?

A

Firms
Markets
Property Rights
Money

23
Q

What are firms?

A

economic unit that hires factors of production & organizes them to produce & sell goods & service
E.g. Loblaws buys buildings, equips them w/ shelves, checkouts, & workers; Loblaws directs labour & decides what to buy & sell

24
Q

What are markets?

A

enables buyers & sellers to get info & do business w/ each other
E.g. world oil market - network of producers, consumers, & brokers who buy & sell oil
Work only when property rights exists

25
Q

What are property rights & list 3 diff types?

A

social arrangement that governs ownership, use & disposal of anything that people value
- Real property - land/buildings, durable goods
- Financial Property - stocks, bonds, money
Intellectual property - creative efforts (books, music, inventions)
- Protected by copyright
- Creates incentive to specialize & produce goods/services in comparative advantage

26
Q

What is money?

A

means of payment