Chapter 2: Trade-Offs and Trade - The Production Possibility Frontier

Question 1

What does the production possibility frontier show? (2)

Answer 1

• shows trade-offs facing an economy that produces only 2 goods
• shows maximum quantity of one good that can be produced for any given production of the other good

Question 2

PPF graph

Answer 2

• At point C, we are not using resources in the best way (unemployment, etc)
• Any point on the frontier is productively efficient (what we produce as a society)
• NF means we do not have the resources

Question 3

What does the PPF model demonstrate? (4)

Answer 3

1. Trade-offs - increasing OC
2. economic growth
3. OC and Comparative advantage
4. Specialization and trade

Question 4

How do you find the opportunity cost of the horizontal axis variable?

Answer 4

• slope
• ex. if we want a unit of x, we give up OC___ units of y variable
• note the curve goes outwards

Question 5

What is economic growth? (3)

Answer 5

• increase in capacity
• increase in resources (land, labour, capital, human capital)
• increase in technology (how we use resources)

Question 6

What are the characteristics of economic growth? (3)

Answer 6

• curve shifts out (not parallel)
• long run concept
• can also decline

Question 7

What are business cycles?

Answer 7

• movement around capacity

Question 8

What is it called when the economy is working within the PPF (not on frontier)? (3)

Answer 8

recession
- within the possibilities
- doing less than what could be

Question 9

What is it called when the economy is working outside the PPF (not sustainable - overheated)? (3)

Answer 9

• boom
• overusing resources
• creates inflation
  ex. working overtime

Question 10

Graph of broken window fallacy

Answer 10

Question 11

economic recessions leave the economy below its ________, while economic ____ drive it above its normal level

Answer 11

• normal capacity
• expansions

Question 12

A society can influence economic growth by the choices we make as a society. Instead of thinking of PPF with 2 goods, we can expand it into two TYPES of goods. Name these two

Answer 12

• consumption goods
• investment goods

Question 13

What are investment goods?

Answer 13

• goods for the future
• in lecture, it reduces consumption of current resources for later

Question 14

What are examples of investment goods? (4)

Answer 14

• capital goods
• research and edu
• preventive medicine
• increase quantity and quality of resources

Question 15

What are consumption goods?

Answer 15

• goods for the present
• pizza, clothes, etc.

Question 16

Future goods vs current goods graph

Answer 16

Question 17

What is a comparative advantage?

Answer 17

• an individual has a comparative advantage in producing a good or service if the opportunity cost of producing a good is lower for them than for other people

Question 18

What is absolute advantage?

Answer 18

• if the individual can do the activity better than other people

Question 19

What are 2 sources of comparative advantage?

Answer 19

• individuals
  ex. natural talent, training, experience
• countries
  ex. natural resources and climate, existing stock of human and physical capital (time dimension)

Question 20

What are 2 sources of comparative advantage?

Answer 20

• individuals
  ex. natural talent, training, experience
• countries
  ex. natural resources and climate, existing stock of human and physical capital (time dimension)

Question 21

Total output is a principle of comparative advantage. What is it>

Answer 21

• its largest when each person/country concentrates on the activities for which his or her OC is the lowest
  ex. old marriages

Question 22

Rationale for market exchange is a principle of comparative advantage. What is it?

Answer 22

• greatest benefits from specialization accrue when the traders have widely different opportunity costs

Question 23

What are some terms of trade?

Answer 23

• price of jet/train in Brazil/Canada example
• OC