Chapter 2: The Economic Problem

Question 1

What does the PPF stand for?

Answer 1

Production possibilities frontier

Question 2

What does the PPF show and what does it assume?

Answer 2

It shows the limits to production of these two good given the total resources and technology available to produce them.

It assumes that 1) the country is only producing 2 goods and 2) the quantity of all other goods remains the same

Question 3

What is production efficiency and when is this reached?

Answer 3

We reach production efficiency if we produce goods and services at the lowest possible cost (ON the PPF)

Question 4

What is allocative efficiency, when is it achieved?

Answer 4

When goods and services are produced at the lowest possible cost and at quantities that brings most benefits.
The best point of the PPF, where we cannot produce more of one good without giving up some other good that provides greater benefit.
It is achieved when the MB curve intersects the MC curve.

Question 5

What is marginal cost? How is it calculated?

Answer 5

It is the opportunity cost of producing ONE more unit of the good or service.
It is calculated by the slope of the PPF.

Question 6

What is marginal benefit and how is is measured?

Answer 6

The marginal benefit is the benefit one receives from consuming one more unit of the good or service.
It is measured by how much one is willing to pay for ONE more unit.

Question 7

What is economic growth?

Answer 7

It is the expansion of production possibilities and the increase of the standard of living. The expansion of the PPF.

Question 8

What are the two key factors of economic growth?

Answer 8

1) technological change
- development of new goods and/or better ways of producing goods (efficiency)
2) capital accumulation
- growth of capital resources (tools, instruments, human knowledge)

Question 9

What is the opportunity cost of economic growth?

Answer 9

The decrease in current consumption is our opportunity cost, because we must decrease consumption to advance in technology or capital

Question 10

What does it mean to specialize in something?

Answer 10

It means that you produce one or few goods

Question 11

What is comparative advantage and what does it compare?

Answer 11

A person has comparative advantage if they can produce a good at a lower opportunity cost than others.
It involves comparing opportunity cost

Question 12

What is absolute advantage and what does it compare?

Answer 12

When you are more productive than others

It compares productivity

Question 13

What is the PPF?

Answer 13

It is the boundary what goods and services that can and can’t be produced.

Question 14

How does the PPF illustrate scarcity?

Answer 14

Because the points outside the PPF are unattainable.

Question 15

What are unused resources?

Answer 15

Resources that are idle, but could have a use

Question 16

What are misallocated resources?

Answer 16

When resources are available to be used, but they are being used in the wrong reasons.

Question 17

As you move along the PPF, what do you face?

Answer 17

You face a tradeoff along the curve, because you are forced to make a decision.

Question 18

How do you calculate the opportunity cost with the PPF?

Answer 18

Opp. cost of making good x = units of good y / units of good x

opp. cost of making good y = units of good x / units of good y

Question 19

What does the bowed outward shape of the PPF demonstrate?

Answer 19

It demonstrates the increasing opportunity cost.

Resources are not all equally productive in all activities.

Question 20

What is the principle of decreasing marginal benefit?

Answer 20

The more we consume, the less we want to pay for another unit of it.

Question 21

When is it acceptable to make a trade?

Answer 21

Two economies will make a trade if it is done at a rate that is between their opportunity costs.