Chapter 3

Question 1

Consumable outputs

Answer 1

goods and services

Question 2

What are the categories of resources/Inputs and what are their costs?

Answer 2

1. Natural resources/land (rent)
2. Labor (wages)
3. Capital (Interest)
4. Entrepreneurship (profit)

Question 3

What is the production process?

Answer 3

turns inputs into consumable outputs

Question 4

Technology

Answer 4

the way that inputs are combined to produce outputs

Question 5

Make work fallacy

Answer 5

the idea that jobs are valuable, whether or not the labor’s production adds value

Question 6

The PPF model assumes 3 things:

Answer 6

1. Only two goods are produced over a time period.
2. Some fixed amount of resources is used.
3. A given technology is used.

Question 7

Law of Increasing Opportunity Cost

Answer 7

as more of a good is produced, the opportunity cost of producing a unit of that good rises, in terms of other goods which must be sacrificed

Question 8

The PPF would be a straight line if:

Answer 8

all resources were equally productive

Question 9

What principle is at the heart of the LIOC?

Answer 9

optimal arrangement principle

Question 10

Which point on PPF is best?

Answer 10

PPF only shows possibilities: we would have to know the preferences for the different outputs produced to determine the best point

Question 11

How is the eventual point on the PPF chosen?

Answer 11

through spontaneous order (market economy) by authoritarian decision makers (authoritarian economy)

Question 12

What does economic growth look like on a PPF and what causes it?

Answer 12

shift right; expansion of an economy’s productive capabilities, caused by more resources, better resources, or technology

Question 13

What increases one’s human capital?

Answer 13

education and training

Question 14

What is Adam Smith’s “invisible hand”?

Answer 14

“by pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it”

Question 15

For individuals and entire economies, income and wealth depend on what three things?

Answer 15

1. Quantity of resources
2. Quality of resources
3. Freedom to use those resources

Question 16

What did Adam Smith say about the wealth of a country?

Answer 16

“the wealth of a country consists not in its gold and silver, but in its lands, houses, and consumable goods of all different kinds”

Question 17

T/F To be wealthy we must 1st put our efforts toward consumption?

Answer 17

before we can consume, we must create value

Question 18

In what ways is value created?

Answer 18

production and trade

Question 19

What are the characteristics of land?

Answer 19

tangible but not produced by anyone

Question 20

What is labor?

Answer 20

physical and mental talents applied to production

Question 21

What is capital?

Answer 21

produced means of production

Question 22

What does Bastiat say will control grain profits? What will control costs?

Answer 22

competition will bid profits down and keep costs low

Question 23

What does Bastiat predict about the cost of grain as government attempts to replace private grain shippers? Why?

Answer 23

they will not have lower costs because all jobs must be done and the bureaucrat will not do them from love, no more than the business person. They will not have competition to keep costs low.

Question 24

What would make someone think that middlemen add value?

Answer 24

Value is measured by willingness to pay, and if they added no value, no one would pay theme

Question 25

What did Adam Smith say about the butcher, brewer and baker?

Answer 25

"It is not from the benevolence of the butcher, the brewer, and the baker that we expect our dinner, but from their regard to their own self interest"